Correlation Between Northern Stock and Northern Income
Can any of the company-specific risk be diversified away by investing in both Northern Stock and Northern Income 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 Stock and Northern Income into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Northern Stock Index and Northern Income Equity, you can compare the effects of market volatilities on Northern Stock and Northern Income 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 Stock with a short position of Northern Income. Check out your portfolio center. Please also check ongoing floating volatility patterns of Northern Stock and Northern Income.
Diversification Opportunities for Northern Stock and Northern Income
0.94 | Correlation Coefficient |
Almost no diversification
The 3 months correlation between Northern and Northern is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Northern Stock Index and Northern Income Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Income Equity and Northern Stock 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 Stock Index are associated (or correlated) with Northern Income. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northern Income Equity has no effect on the direction of Northern Stock i.e., Northern Stock and Northern Income go up and down completely randomly.
Pair Corralation between Northern Stock and Northern Income
Assuming the 90 days horizon Northern Stock is expected to generate 1.01 times less return on investment than Northern Income. But when comparing it to its historical volatility, Northern Stock Index is 1.02 times less risky than Northern Income. It trades about 0.11 of its potential returns per unit of risk. Northern Income Equity is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest 1,156 in Northern Income Equity on August 25, 2024 and sell it today you would earn a total of 613.00 from holding Northern Income Equity or generate 53.03% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Northern Stock Index vs. Northern Income Equity
Performance |
| Timeline |
| Northern Stock Index |
| Northern Income Equity |
Northern Stock and Northern Income Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Northern Stock and Northern Income
The main advantage of trading using opposite Northern Stock and Northern Income positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Northern Stock position performs unexpectedly, Northern Income 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 Income will offset losses from the drop in Northern Income's long position.| Northern Stock vs. Northern Small Cap | Northern Stock vs. Northern International Equity | Northern Stock vs. Northern Mid Cap | Northern Stock vs. Northern Bond Index |
| Northern Income vs. Northern High Yield | Northern Income vs. Northern International Equity | Northern Income vs. Northern Large Cap | Northern Income vs. Northern Stock Index |
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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.
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