Correlation Between Northern Bond and Northern Income

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

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

Diversification Opportunities for Northern Bond and Northern Income

0.11

Correlation Coefficient

Northern Bond  Northern Income

Average diversification

The 3 months correlation between Northern and Northern is 0.11. Overlapping area represents the amount of risk that can be diversified away by holding Northern Bond Index and Northern Income Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Income Equity and Northern Bond 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 Bond Index are associated (or correlated) with Northern Income. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northern Income Equity has no effect on the direction of Northern Bond i.e., Northern Bond and Northern Income go up and down completely randomly.

Pair Corralation between Northern Bond and Northern Income

Assuming the 90 days horizon Northern Bond is expected to generate 12.61 times less return on investment than Northern Income. But when comparing it to its historical volatility, Northern Bond Index is 2.13 times less risky than Northern Income. It trades about 0.02 of its potential returns per unit of risk. Northern Income Equity is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  1,343  in Northern Income Equity on October 10, 2024 and sell it today you would earn a total of  338.00  from holding Northern Income Equity or generate 25.17% return on investment over 90 days.

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

Northern Bond Index  vs.  Northern Income Equity

Northern Bond Index

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Northern Bond Index has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Northern Bond is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Northern Income Equity

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Northern Income Equity are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and fundamental indicators, Northern Income 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 Bond and Northern Income

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

The idea behind Northern Bond Index and Northern Income Equity 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.