Correlation Between Lockheed Martin and Northrop Grumman

Can any of the company-specific risk be diversified away by investing in both Lockheed Martin and Northrop Grumman 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 Lockheed Martin and Northrop Grumman into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Lockheed Martin and Northrop Grumman, you can compare the effects of market volatilities on Lockheed Martin and Northrop Grumman 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 Lockheed Martin with a short position of Northrop Grumman. Check out your portfolio center. Please also check ongoing floating volatility patterns of Lockheed Martin and Northrop Grumman.

Diversification Opportunities for Lockheed Martin and Northrop Grumman

0.72

Correlation Coefficient

Lockheed Martin  Northrop Grumman

Poor diversification

The 3 months correlation between Lockheed and Northrop is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Lockheed Martin and Northrop Grumman in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northrop Grumman and Lockheed Martin 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 Lockheed Martin are associated (or correlated) with Northrop Grumman. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northrop Grumman has no effect on the direction of Lockheed Martin i.e., Lockheed Martin and Northrop Grumman go up and down completely randomly.

Pair Corralation between Lockheed Martin and Northrop Grumman

Considering the 90-day investment horizon Lockheed Martin is expected to generate 1.25 times less return on investment than Northrop Grumman. But when comparing it to its historical volatility, Lockheed Martin is 1.66 times less risky than Northrop Grumman. It trades about 0.11 of its potential returns per unit of risk. Northrop Grumman is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  45,948  in Northrop Grumman on February 4, 2024 and sell it today you would earn a total of  961.00  from holding Northrop Grumman or generate 2.09% return on investment over 90 days.

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

Lockheed Martin  vs.  Northrop Grumman

Lockheed Martin

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Lockheed Martin are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak primary indicators, Lockheed Martin may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Northrop Grumman

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Northrop Grumman are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak basic indicators, Northrop Grumman may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Pair Trading with Lockheed Martin and Northrop Grumman

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

The idea behind Lockheed Martin and Northrop Grumman 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 Cryptocurrency Center module to build and monitor diversified portfolio of extremely risky digital assets and cryptocurrency.