Correlation Between Northern Stock and Northern Small

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

Diversification Opportunities for Northern Stock and Northern Small

0.9

Correlation Coefficient

Northern Stock  Northern Small

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 Stock 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 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 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 Stock i.e., Northern Stock and Northern Small go up and down completely randomly.

Pair Corralation between Northern Stock and Northern Small

Assuming the 90 days horizon Northern Stock is expected to generate 1.29 times less return on investment than Northern Small. But when comparing it to its historical volatility, Northern Stock Index is 1.86 times less risky than Northern Small. It trades about 0.19 of its potential returns per unit of risk. 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 Together
Strength	Very Strong
Accuracy	100.0%
Values	Daily Returns

Northern Stock Index  vs.  Northern Small Cap

Northern Stock Index

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Northern Stock Index are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Northern Stock may actually be approaching a critical reversion point that can send shares even higher in January 2025.

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 Stock and Northern Small

The main advantage of trading using opposite Northern Stock and Northern Small positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Northern Stock 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 Stock 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.