Correlation Between Northern Bond and Northern Small

Can any of the company-specific risk be diversified away by investing in both Northern Bond and Northern Small 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 Small 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 Small Cap, you can compare the effects of market volatilities on Northern Bond and Northern Small 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 Small. Check out your portfolio center. Please also check ongoing floating volatility patterns of Northern Bond and Northern Small.

Diversification Opportunities for Northern Bond and Northern Small

-0.59

Correlation Coefficient

Northern Bond  Northern Small

Excellent diversification

The 3 months correlation between Northern and Northern is -0.59. Overlapping area represents the amount of risk that can be diversified away by holding Northern Bond Index and Northern Small Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Small Cap 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 Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northern Small Cap has no effect on the direction of Northern Bond i.e., Northern Bond and Northern Small go up and down completely randomly.

Pair Corralation between Northern Bond and Northern Small

Assuming the 90 days horizon Northern Bond Index is expected to under-perform the Northern Small. But the mutual fund apears to be less risky and, when comparing its historical volatility, Northern Bond Index is 4.0 times less risky than Northern Small. The mutual fund trades about -0.12 of its potential returns per unit of risk. The Northern Small Cap is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  1,449  in Northern Small Cap on September 13, 2024 and sell it today you would earn a total of  145.00  from holding Northern Small Cap or generate 10.01% return on investment over 90 days.

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

Northern Bond Index  vs.  Northern Small Cap

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 Small Cap

Risk-Adjusted Performance

10 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Northern Small Cap are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Northern Small may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Northern Bond and Northern Small

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

The idea behind Northern Bond Index and Northern Small Cap 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 Sync Your Broker module to sync your existing holdings, watchlists, positions or portfolios from thousands of online brokerage services, banks, investment account aggregators and robo-advisors..