Correlation Between Capital Southwest and Northern Trust

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

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

Diversification Opportunities for Capital Southwest and Northern Trust

0.44

Correlation Coefficient

Capital Southwest  Northern Trust

Very weak diversification

The 3 months correlation between Capital and Northern is 0.44. Overlapping area represents the amount of risk that can be diversified away by holding Capital Southwest and Northern Trust in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Trust and Capital Southwest 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 Capital Southwest are associated (or correlated) with Northern Trust. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northern Trust has no effect on the direction of Capital Southwest i.e., Capital Southwest and Northern Trust go up and down completely randomly.

Pair Corralation between Capital Southwest and Northern Trust

Given the investment horizon of 90 days Capital Southwest is expected to generate 0.67 times more return on investment than Northern Trust. However, Capital Southwest is 1.49 times less risky than Northern Trust. It trades about 0.09 of its potential returns per unit of risk. Northern Trust is currently generating about -0.04 per unit of risk. If you would invest  2,116  in Capital Southwest on December 29, 2024 and sell it today you would earn a total of  121.00  from holding Capital Southwest or generate 5.72% return on investment over 90 days.

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

Capital Southwest  vs.  Northern Trust

Capital Southwest

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Capital Southwest are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, Capital Southwest is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Northern Trust

Risk-Adjusted Performance

Very Weak

Over the last 90 days Northern Trust has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Northern Trust is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Capital Southwest and Northern Trust

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

The idea behind Capital Southwest and Northern Trust 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.