Correlation Between Intermediate Government and Northern Small
Can any of the company-specific risk be diversified away by investing in both Intermediate Government 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 Intermediate Government and Northern Small into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Intermediate Government Bond and Northern Small Cap, you can compare the effects of market volatilities on Intermediate Government 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 Intermediate Government with a short position of Northern Small. Check out your portfolio center. Please also check ongoing floating volatility patterns of Intermediate Government and Northern Small.
Diversification Opportunities for Intermediate Government and Northern Small
-0.15 | Correlation Coefficient |
Good diversification
The 3 months correlation between Intermediate and Northern is -0.15. Overlapping area represents the amount of risk that can be diversified away by holding Intermediate Government Bond 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 Intermediate Government 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 Intermediate Government Bond 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 Intermediate Government i.e., Intermediate Government and Northern Small go up and down completely randomly.
Pair Corralation between Intermediate Government and Northern Small
Assuming the 90 days horizon Intermediate Government is expected to generate 17.95 times less return on investment than Northern Small. But when comparing it to its historical volatility, Intermediate Government Bond is 13.21 times less risky than Northern Small. It trades about 0.08 of its potential returns per unit of risk. Northern Small Cap is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest 1,415 in Northern Small Cap on November 7, 2024 and sell it today you would earn a total of 26.00 from holding Northern Small Cap or generate 1.84% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Intermediate Government Bond vs. Northern Small Cap
Performance |
| Timeline |
| Intermediate Government |
| Northern Small Cap |
Intermediate Government and Northern Small Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Intermediate Government and Northern Small
The main advantage of trading using opposite Intermediate Government and Northern Small positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Intermediate Government 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 Intermediate Government Bond 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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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 Portfolio Anywhere module to track or share privately all of your investments from the convenience of any device.
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