Correlation Between Northern Small and Royce Opportunity

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

Diversification Opportunities for Northern Small and Royce Opportunity

0.93

Correlation Coefficient

Northern Small  Royce Opportunity

Almost no diversification

The 3 months correlation between Northern and Royce is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Northern Small Cap and Royce Opportunity Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Royce Opportunity 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 Royce Opportunity. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Royce Opportunity has no effect on the direction of Northern Small i.e., Northern Small and Royce Opportunity go up and down completely randomly.

Pair Corralation between Northern Small and Royce Opportunity

Assuming the 90 days horizon Northern Small Cap is expected to generate 0.87 times more return on investment than Royce Opportunity. However, Northern Small Cap is 1.15 times less risky than Royce Opportunity. It trades about -0.09 of its potential returns per unit of risk. Royce Opportunity Fund is currently generating about -0.1 per unit of risk. If you would invest  1,396  in Northern Small Cap on December 21, 2024 and sell it today you would lose (93.00) from holding Northern Small Cap or give up 6.66% 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.  Royce Opportunity Fund

Northern Small Cap

Risk-Adjusted Performance

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 latest weak performance, the Fund's fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Royce Opportunity

Risk-Adjusted Performance

Very Weak

Over the last 90 days Royce Opportunity Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Pair Trading with Northern Small and Royce Opportunity

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

The idea behind Northern Small Cap and Royce Opportunity Fund 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.