Correlation Between Northern Emerging and Northern Stock

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

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

Diversification Opportunities for Northern Emerging and Northern Stock

-0.27

Correlation Coefficient

Northern Emerging  Northern Stock

Very good diversification

The 3 months correlation between Northern and Northern is -0.27. Overlapping area represents the amount of risk that can be diversified away by holding Northern Emerging Markets and Northern Stock Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Stock Index and Northern Emerging 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 Emerging Markets are associated (or correlated) with Northern Stock. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northern Stock Index has no effect on the direction of Northern Emerging i.e., Northern Emerging and Northern Stock go up and down completely randomly.

Pair Corralation between Northern Emerging and Northern Stock

Assuming the 90 days horizon Northern Emerging Markets is expected to generate 0.94 times more return on investment than Northern Stock. However, Northern Emerging Markets is 1.07 times less risky than Northern Stock. It trades about 0.08 of its potential returns per unit of risk. Northern Stock Index is currently generating about -0.09 per unit of risk. If you would invest  1,115  in Northern Emerging Markets on December 30, 2024 and sell it today you would earn a total of  49.00  from holding Northern Emerging Markets or generate 4.39% return on investment over 90 days.

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

Northern Emerging Markets  vs.  Northern Stock Index

Northern Emerging Markets

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Northern Emerging Markets are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong primary indicators, Northern Emerging is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Northern Stock Index

Risk-Adjusted Performance

Very Weak

Over the last 90 days Northern Stock Index has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, Northern Stock 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 Emerging and Northern Stock

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

The idea behind Northern Emerging Markets and Northern Stock Index 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.