Correlation Between Northern E and Active M

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

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

Diversification Opportunities for Northern E and Active M

0.67

Correlation Coefficient

Northern E  Active M

Poor diversification

The 3 months correlation between Northern and Active is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding Northern E Bond and Active M Emerging in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Active M Emerging and Northern E 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 E Bond are associated (or correlated) with Active M. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Active M Emerging has no effect on the direction of Northern E i.e., Northern E and Active M go up and down completely randomly.

Pair Corralation between Northern E and Active M

Assuming the 90 days horizon Northern E is expected to generate 3.02 times less return on investment than Active M. But when comparing it to its historical volatility, Northern E Bond is 2.04 times less risky than Active M. It trades about 0.03 of its potential returns per unit of risk. Active M Emerging is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  1,254  in Active M Emerging on September 23, 2024 and sell it today you would earn a total of  240.00  from holding Active M Emerging or generate 19.14% return on investment over 90 days.

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

Northern E Bond  vs.  Active M Emerging

Northern E Bond

Risk-Adjusted Performance

0 of 100

Very Weak

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

Active M Emerging

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Active M Emerging has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong technical and fundamental indicators, Active M 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 E and Active M

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

The idea behind Northern E Bond and Active M Emerging 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.