Correlation Between Vanguard Large and Northern Lights

Can any of the company-specific risk be diversified away by investing in both Vanguard Large and Northern Lights 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 Vanguard Large and Northern Lights into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Vanguard Large Cap Index and Northern Lights, you can compare the effects of market volatilities on Vanguard Large and Northern Lights 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 Vanguard Large with a short position of Northern Lights. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard Large and Northern Lights.

Diversification Opportunities for Vanguard Large and Northern Lights

0.98

Correlation Coefficient

Vanguard Large  Northern Lights

Almost no diversification

The 3 months correlation between Vanguard and Northern is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Large Cap Index and Northern Lights in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Lights and Vanguard Large 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 Vanguard Large Cap Index are associated (or correlated) with Northern Lights. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northern Lights has no effect on the direction of Vanguard Large i.e., Vanguard Large and Northern Lights go up and down completely randomly.

Pair Corralation between Vanguard Large and Northern Lights

Allowing for the 90-day total investment horizon Vanguard Large is expected to generate 1.01 times less return on investment than Northern Lights. In addition to that, Vanguard Large is 1.26 times more volatile than Northern Lights. It trades about 0.14 of its total potential returns per unit of risk. Northern Lights is currently generating about 0.17 per unit of volatility. If you would invest  2,611  in Northern Lights on August 30, 2024 and sell it today you would earn a total of  184.00  from holding Northern Lights or generate 7.05% return on investment over 90 days.

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

Vanguard Large Cap Index  vs.  Northern Lights

Vanguard Large Cap

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Large Cap Index are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Vanguard Large may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Northern Lights

Risk-Adjusted Performance

0 of 100

Good

Over the last 90 days Northern Lights has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively weak basic indicators, Northern Lights may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with Vanguard Large and Northern Lights

The main advantage of trading using opposite Vanguard Large and Northern Lights positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Vanguard Large position performs unexpectedly, Northern Lights 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 Northern Lights will offset losses from the drop in Northern Lights' long position.

The idea behind Vanguard Large Cap Index and Northern Lights 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.