Correlation Between Union Pacific and Norfolk Southern

Can any of the company-specific risk be diversified away by investing in both Union Pacific and Norfolk Southern at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Union Pacific and Norfolk Southern into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Union Pacific and Norfolk Southern, you can compare the effects of market volatilities on Union Pacific and Norfolk Southern and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Union Pacific with a short position of Norfolk Southern. Check out your portfolio center. Please also check ongoing floating volatility patterns of Union Pacific and Norfolk Southern.

Diversification Opportunities for Union Pacific and Norfolk Southern

0.72

Correlation Coefficient

Union Pacific  Norfolk Southern

Poor diversification

The 3 months correlation between Union and Norfolk is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Union Pacific and Norfolk Southern in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Norfolk Southern and Union Pacific is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Union Pacific are associated (or correlated) with Norfolk Southern. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Norfolk Southern has no effect on the direction of Union Pacific i.e., Union Pacific and Norfolk Southern go up and down completely randomly.

Pair Corralation between Union Pacific and Norfolk Southern

Assuming the 90 days horizon Union Pacific is expected to generate 2.97 times less return on investment than Norfolk Southern. But when comparing it to its historical volatility, Union Pacific is 1.35 times less risky than Norfolk Southern. It trades about 0.01 of its potential returns per unit of risk. Norfolk Southern is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  22,071  in Norfolk Southern on September 22, 2024 and sell it today you would earn a total of  329.00  from holding Norfolk Southern or generate 1.49% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	100.0%
Values	Daily Returns

Union Pacific  vs.  Norfolk Southern

Union Pacific

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Union Pacific has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Union Pacific is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Norfolk Southern

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Norfolk Southern are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Norfolk Southern is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Union Pacific and Norfolk Southern

The main advantage of trading using opposite Union Pacific and Norfolk Southern positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Union Pacific position performs unexpectedly, Norfolk Southern can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Norfolk Southern will offset losses from the drop in Norfolk Southern's long position.

The idea behind Union Pacific and Norfolk Southern pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.