Correlation Between Northern International and Northern Emerging
Can any of the company-specific risk be diversified away by investing in both Northern International and Northern Emerging 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 International and Northern Emerging into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Northern International Equity and Northern Emerging Markets, you can compare the effects of market volatilities on Northern International and Northern Emerging 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 International with a short position of Northern Emerging. Check out your portfolio center. Please also check ongoing floating volatility patterns of Northern International and Northern Emerging.
Diversification Opportunities for Northern International and Northern Emerging
0.49 | Correlation Coefficient |
Very weak diversification
The 3 months correlation between Northern and Northern is 0.49. Overlapping area represents the amount of risk that can be diversified away by holding Northern International Equity and Northern Emerging Markets in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Emerging Markets and Northern International 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 International Equity are associated (or correlated) with Northern Emerging. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northern Emerging Markets has no effect on the direction of Northern International i.e., Northern International and Northern Emerging go up and down completely randomly.
Pair Corralation between Northern International and Northern Emerging
Assuming the 90 days horizon Northern International is expected to generate 1.33 times less return on investment than Northern Emerging. But when comparing it to its historical volatility, Northern International Equity is 1.17 times less risky than Northern Emerging. It trades about 0.04 of its potential returns per unit of risk. Northern Emerging Markets is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest 1,070 in Northern Emerging Markets on August 25, 2024 and sell it today you would earn a total of 93.00 from holding Northern Emerging Markets or generate 8.69% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Northern International Equity vs. Northern Emerging Markets
Performance |
| Timeline |
| Northern International |
| Northern Emerging Markets |
Northern International and Northern Emerging Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Northern International and Northern Emerging
The main advantage of trading using opposite Northern International and Northern Emerging positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Northern International position performs unexpectedly, Northern Emerging 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 Emerging will offset losses from the drop in Northern Emerging's long position.The idea behind Northern International Equity and Northern Emerging Markets 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.
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