Correlation Between Northern Large and Northern Mid

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

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

Diversification Opportunities for Northern Large and Northern Mid

0.9

Correlation Coefficient

Northern Large  Northern Mid

Almost no diversification

The 3 months correlation between Northern and Northern is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Northern Large Cap and Northern Mid Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Mid Cap and Northern Large 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 Large Cap are associated (or correlated) with Northern Mid. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northern Mid Cap has no effect on the direction of Northern Large i.e., Northern Large and Northern Mid go up and down completely randomly.

Pair Corralation between Northern Large and Northern Mid

Assuming the 90 days horizon Northern Large Cap is expected to generate 0.6 times more return on investment than Northern Mid. However, Northern Large Cap is 1.67 times less risky than Northern Mid. It trades about -0.01 of its potential returns per unit of risk. Northern Mid Cap is currently generating about -0.28 per unit of risk. If you would invest  2,126  in Northern Large Cap on December 4, 2024 and sell it today you would lose (2.00) from holding Northern Large Cap or give up 0.09% of portfolio value over 90 days.

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

Northern Large Cap  vs.  Northern Mid Cap

Northern Large Cap

Risk-Adjusted Performance

Very Weak

Over the last 90 days Northern Large Cap has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Northern Mid Cap

Risk-Adjusted Performance

Very Weak

Over the last 90 days Northern Mid Cap has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's forward indicators remain fairly strong which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Northern Large and Northern Mid

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

The idea behind Northern Large Cap and Northern Mid 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.