Correlation Between Northern Small and Northern Quality

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

Diversification Opportunities for Northern Small and Northern Quality

0.9

Correlation Coefficient

Northern Small  Northern Quality

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 Small Cap and Northern Quality Esg in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Quality Esg 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 Quality. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northern Quality Esg has no effect on the direction of Northern Small i.e., Northern Small and Northern Quality go up and down completely randomly.

Pair Corralation between Northern Small and Northern Quality

Assuming the 90 days horizon Northern Small is expected to generate 1.67 times less return on investment than Northern Quality. In addition to that, Northern Small is 1.61 times more volatile than Northern Quality Esg. It trades about 0.04 of its total potential returns per unit of risk. Northern Quality Esg is currently generating about 0.1 per unit of volatility. If you would invest  1,406  in Northern Quality Esg on September 23, 2024 and sell it today you would earn a total of  708.00  from holding Northern Quality Esg or generate 50.36% return on investment 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 Quality Esg

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 Quality Esg

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Northern Quality Esg are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Northern Quality 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 Quality

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

The idea behind Northern Small Cap and Northern Quality Esg 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.

Check out your portfolio center.

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 Insider Screener module to find insiders across different sectors to evaluate their impact on performance.