Correlation Between Norsk Hydro and BASF SE
Can any of the company-specific risk be diversified away by investing in both Norsk Hydro and BASF SE 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 Norsk Hydro and BASF SE into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Norsk Hydro ASA and BASF SE NA, you can compare the effects of market volatilities on Norsk Hydro and BASF SE 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 Norsk Hydro with a short position of BASF SE. Check out your portfolio center. Please also check ongoing floating volatility patterns of Norsk Hydro and BASF SE.
Diversification Opportunities for Norsk Hydro and BASF SE
0.77 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Norsk and BASF is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Norsk Hydro ASA and BASF SE NA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BASF SE NA and Norsk Hydro 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 Norsk Hydro ASA are associated (or correlated) with BASF SE. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BASF SE NA has no effect on the direction of Norsk Hydro i.e., Norsk Hydro and BASF SE go up and down completely randomly.
Pair Corralation between Norsk Hydro and BASF SE
Assuming the 90 days horizon Norsk Hydro ASA is expected to under-perform the BASF SE. In addition to that, Norsk Hydro is 1.41 times more volatile than BASF SE NA. It trades about -0.32 of its total potential returns per unit of risk. BASF SE NA is currently generating about -0.3 per unit of volatility. If you would invest 5,612 in BASF SE NA on January 11, 2025 and sell it today you would lose (1,036) from holding BASF SE NA or give up 18.46% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Norsk Hydro ASA vs. BASF SE NA
Performance |
| Timeline |
| Norsk Hydro ASA |
| BASF SE NA |
Norsk Hydro and BASF SE Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Norsk Hydro and BASF SE
The main advantage of trading using opposite Norsk Hydro and BASF SE positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Norsk Hydro position performs unexpectedly, BASF SE 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 BASF SE will offset losses from the drop in BASF SE's long position.The idea behind Norsk Hydro ASA and BASF SE NA 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 Portfolio Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.
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