Correlation Between Northern Stock and Northern Global

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

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

Diversification Opportunities for Northern Stock and Northern Global

0.71

Correlation Coefficient

Northern Stock  Northern Global

Poor diversification

The 3 months correlation between Northern and Northern is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding Northern Stock Index and Northern Global Real in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Global Real and Northern Stock 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 Stock Index are associated (or correlated) with Northern Global. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northern Global Real has no effect on the direction of Northern Stock i.e., Northern Stock and Northern Global go up and down completely randomly.

Pair Corralation between Northern Stock and Northern Global

Assuming the 90 days horizon Northern Stock Index is expected to under-perform the Northern Global. In addition to that, Northern Stock is 1.09 times more volatile than Northern Global Real. It trades about -0.04 of its total potential returns per unit of risk. Northern Global Real is currently generating about -0.04 per unit of volatility. If you would invest  1,011  in Northern Global Real on December 2, 2024 and sell it today you would lose (24.00) from holding Northern Global Real or give up 2.37% of portfolio value over 90 days.

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

Northern Stock Index  vs.  Northern Global Real

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.

Northern Global Real

Risk-Adjusted Performance

Very Weak

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

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

The idea behind Northern Stock Index and Northern Global Real 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.