Correlation Between Northern Small and Northern Bond
Can any of the company-specific risk be diversified away by investing in both Northern Small and Northern Bond 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 Bond 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 Bond Index, you can compare the effects of market volatilities on Northern Small and Northern Bond 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 Bond. Check out your portfolio center. Please also check ongoing floating volatility patterns of Northern Small and Northern Bond.
Diversification Opportunities for Northern Small and Northern Bond
-0.57 | Correlation Coefficient |
Excellent diversification
The 3 months correlation between Northern and Northern is -0.57. Overlapping area represents the amount of risk that can be diversified away by holding Northern Small Cap and Northern Bond Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Bond Index 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 Bond. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northern Bond Index has no effect on the direction of Northern Small i.e., Northern Small and Northern Bond go up and down completely randomly.
Pair Corralation between Northern Small and Northern Bond
Assuming the 90 days horizon Northern Small Cap is expected to generate 2.94 times more return on investment than Northern Bond. However, Northern Small is 2.94 times more volatile than Northern Bond Index. It trades about 0.05 of its potential returns per unit of risk. Northern Bond Index is currently generating about 0.03 per unit of risk. If you would invest 1,746 in Northern Small Cap on August 25, 2024 and sell it today you would earn a total of 493.00 from holding Northern Small Cap or generate 28.24% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Northern Small Cap vs. Northern Bond Index
Performance |
| Timeline |
| Northern Small Cap |
| Northern Bond Index |
Northern Small and Northern Bond Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Northern Small and Northern Bond
The main advantage of trading using opposite Northern Small and Northern Bond positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Northern Small position performs unexpectedly, Northern Bond 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 Bond will offset losses from the drop in Northern Bond's long position.| Northern Small vs. American Beacon Large | Northern Small vs. Harbor International Fund | Northern Small vs. Credit Suisse Modity | Northern Small vs. Metropolitan West Total |
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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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.
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