Correlation Between Northern Lights and ProShares UltraShort

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

By analyzing existing cross correlation between Northern Lights and ProShares UltraShort MidCap400, you can compare the effects of market volatilities on Northern Lights and ProShares UltraShort 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 Northern Lights with a short position of ProShares UltraShort. Check out your portfolio center. Please also check ongoing floating volatility patterns of Northern Lights and ProShares UltraShort.

Diversification Opportunities for Northern Lights and ProShares UltraShort

-0.84

Correlation Coefficient

Northern Lights  ProShares UltraShort

Pay attention - limited upside

The 3 months correlation between Northern and ProShares is -0.84. Overlapping area represents the amount of risk that can be diversified away by holding Northern Lights and ProShares UltraShort MidCap400 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ProShares UltraShort and Northern Lights 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 Northern Lights are associated (or correlated) with ProShares UltraShort. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ProShares UltraShort has no effect on the direction of Northern Lights i.e., Northern Lights and ProShares UltraShort go up and down completely randomly.

Pair Corralation between Northern Lights and ProShares UltraShort

Given the investment horizon of 90 days Northern Lights is expected to generate 0.44 times more return on investment than ProShares UltraShort. However, Northern Lights is 2.29 times less risky than ProShares UltraShort. It trades about 0.07 of its potential returns per unit of risk. ProShares UltraShort MidCap400 is currently generating about 0.01 per unit of risk. If you would invest  3,282  in Northern Lights on September 22, 2024 and sell it today you would earn a total of  129.00  from holding Northern Lights or generate 3.93% return on investment over 90 days.

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

Northern Lights  vs.  ProShares UltraShort MidCap400

Northern Lights

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Northern Lights are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite fairly strong basic indicators, Northern Lights is not utilizing all of its potentials. The current stock price confusion, may contribute to short-horizon losses for the traders.

ProShares UltraShort

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days ProShares UltraShort MidCap400 has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, ProShares UltraShort is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Northern Lights and ProShares UltraShort

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

The idea behind Northern Lights and ProShares UltraShort MidCap400 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.

Check out your portfolio center.

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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.