Correlation Between Smallcap World and Northern Stock
Can any of the company-specific risk be diversified away by investing in both Smallcap World and Northern Stock 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 Smallcap World and Northern Stock into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Smallcap World Fund and Northern Stock Index, you can compare the effects of market volatilities on Smallcap World and Northern Stock 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 Smallcap World with a short position of Northern Stock. Check out your portfolio center. Please also check ongoing floating volatility patterns of Smallcap World and Northern Stock.
Diversification Opportunities for Smallcap World and Northern Stock
0.76 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Smallcap and Northern is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding Smallcap World Fund and Northern Stock Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Stock Index and Smallcap World 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 Smallcap World Fund are associated (or correlated) with Northern Stock. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northern Stock Index has no effect on the direction of Smallcap World i.e., Smallcap World and Northern Stock go up and down completely randomly.
Pair Corralation between Smallcap World and Northern Stock
Assuming the 90 days horizon Smallcap World is expected to generate 1.88 times less return on investment than Northern Stock. In addition to that, Smallcap World is 1.13 times more volatile than Northern Stock Index. It trades about 0.06 of its total potential returns per unit of risk. Northern Stock Index is currently generating about 0.12 per unit of volatility. If you would invest 5,477 in Northern Stock Index on September 3, 2024 and sell it today you would earn a total of 732.00 from holding Northern Stock Index or generate 13.36% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Smallcap World Fund vs. Northern Stock Index
Performance |
| Timeline |
| Smallcap World |
| Northern Stock Index |
Smallcap World and Northern Stock Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Smallcap World and Northern Stock
The main advantage of trading using opposite Smallcap World and Northern Stock positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Smallcap World position performs unexpectedly, Northern Stock 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 Stock will offset losses from the drop in Northern Stock's long position.| Smallcap World vs. New World Fund | Smallcap World vs. Washington Mutual Investors | Smallcap World vs. Europacific Growth Fund | Smallcap World vs. New Perspective Fund |
| Northern Stock vs. New World Fund | Northern Stock vs. Washington Mutual Investors | Northern Stock vs. Smallcap World Fund | Northern Stock vs. Capital World Growth |
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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.
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