Correlation Between Northern Lights and Strategy Shares

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

By analyzing existing cross correlation between Northern Lights and Strategy Shares, you can compare the effects of market volatilities on Northern Lights and Strategy Shares 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 Strategy Shares. Check out your portfolio center. Please also check ongoing floating volatility patterns of Northern Lights and Strategy Shares.

Diversification Opportunities for Northern Lights and Strategy Shares

0.95

Correlation Coefficient

Northern Lights  Strategy Shares

Almost no diversification

The 3 months correlation between Northern and Strategy is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding Northern Lights and Strategy Shares in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Strategy Shares 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 Strategy Shares. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Strategy Shares has no effect on the direction of Northern Lights i.e., Northern Lights and Strategy Shares go up and down completely randomly.

Pair Corralation between Northern Lights and Strategy Shares

Given the investment horizon of 90 days Northern Lights is expected to generate 1.49 times more return on investment than Strategy Shares. However, Northern Lights is 1.49 times more volatile than Strategy Shares. It trades about 0.29 of its potential returns per unit of risk. Strategy Shares is currently generating about 0.19 per unit of risk. If you would invest  3,202  in Northern Lights on February 22, 2025 and sell it today you would earn a total of  221.84  from holding Northern Lights or generate 6.93% return on investment over 90 days.

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

Northern Lights  vs.  Strategy Shares

Northern Lights

Risk-Adjusted Performance

Very Weak

Over the last 90 days Northern Lights has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound fundamental indicators, Northern Lights is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Strategy Shares

Risk-Adjusted Performance

Very Weak

Over the last 90 days Strategy Shares has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Strategy Shares is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Northern Lights and Strategy Shares

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

The idea behind Northern Lights and Strategy Shares 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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.