Correlation Between Northern Small and California Intermediate

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

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

Diversification Opportunities for Northern Small and California Intermediate

0.5

Correlation Coefficient

Northern Small  California Intermediate

Very weak diversification

The 3 months correlation between Northern and California is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding Northern Small Cap and California Intermediate Term T in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on California Intermediate and Northern Small 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 Small Cap are associated (or correlated) with California Intermediate. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of California Intermediate has no effect on the direction of Northern Small i.e., Northern Small and California Intermediate go up and down completely randomly.

Pair Corralation between Northern Small and California Intermediate

Assuming the 90 days horizon Northern Small Cap is expected to generate 7.62 times more return on investment than California Intermediate. However, Northern Small is 7.62 times more volatile than California Intermediate Term Tax Free. It trades about 0.03 of its potential returns per unit of risk. California Intermediate Term Tax Free is currently generating about 0.03 per unit of risk. If you would invest  1,190  in Northern Small Cap on October 10, 2024 and sell it today you would earn a total of  215.00  from holding Northern Small Cap or generate 18.07% return on investment over 90 days.

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

Northern Small Cap  vs.  California Intermediate Term T

Northern Small Cap

Risk-Adjusted Performance

0 of 100

Very Weak

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

California Intermediate

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days California Intermediate Term Tax Free has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, California Intermediate 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 Small and California Intermediate

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

The idea behind Northern Small Cap and California Intermediate Term Tax Free 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 Analysis module to research over 250,000 global equities including funds, stocks and ETFs to find investment opportunities.