Correlation Between Northern Small and Northern Large

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

Diversification Opportunities for Northern Small and Northern Large

0.94

Correlation Coefficient

Northern Small  Northern Large

Almost no diversification

The 3 months correlation between Northern and Northern is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Northern Small Cap and Northern Large Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Large Cap 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 Northern Large. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northern Large Cap has no effect on the direction of Northern Small i.e., Northern Small and Northern Large go up and down completely randomly.

Pair Corralation between Northern Small and Northern Large

Assuming the 90 days horizon Northern Small Cap is expected to under-perform the Northern Large. But the mutual fund apears to be less risky and, when comparing its historical volatility, Northern Small Cap is 1.02 times less risky than Northern Large. The mutual fund trades about -0.4 of its potential returns per unit of risk. The Northern Large Cap is currently generating about -0.27 of returns per unit of risk over similar time horizon. If you would invest  3,132  in Northern Large Cap on September 24, 2024 and sell it today you would lose (307.00) from holding Northern Large Cap or give up 9.8% of portfolio value over 90 days.

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

Northern Small Cap  vs.  Northern Large Cap

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.

Northern Large Cap

Risk-Adjusted Performance

0 of 100

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 fairly strong fundamental indicators, Northern Large 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 Northern Large

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

The idea behind Northern Small Cap and Northern Large 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 Latest Portfolios module to quick portfolio dashboard that showcases your latest portfolios.