Correlation Between Northern Large and Northern Mid

Can any of the company-specific risk be diversified away by investing in both Northern Large and Northern Mid 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 Large and Northern Mid into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Northern Large Cap and Northern Mid Cap, you can compare the effects of market volatilities on Northern Large and Northern Mid 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 Large with a short position of Northern Mid. Check out your portfolio center. Please also check ongoing floating volatility patterns of Northern Large and Northern Mid.

Diversification Opportunities for Northern Large and Northern Mid

0.96

Correlation Coefficient

Northern Large  Northern Mid

Almost no diversification

The 3 months correlation between Northern and Northern is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Northern Large Cap and Northern Mid Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Mid Cap and Northern Large 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 Large Cap are associated (or correlated) with Northern Mid. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northern Mid Cap has no effect on the direction of Northern Large i.e., Northern Large and Northern Mid go up and down completely randomly.

Pair Corralation between Northern Large and Northern Mid

Assuming the 90 days horizon Northern Large Cap is expected to under-perform the Northern Mid. But the mutual fund apears to be less risky and, when comparing its historical volatility, Northern Large Cap is 1.41 times less risky than Northern Mid. The mutual fund trades about -0.17 of its potential returns per unit of risk. The Northern Mid Cap is currently generating about -0.1 of returns per unit of risk over similar time horizon. If you would invest  2,162  in Northern Mid Cap on February 7, 2024 and sell it today you would lose (51.00) from holding Northern Mid Cap or give up 2.36% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	95.45%
Values	Daily Returns

Northern Large Cap  vs.  Northern Mid Cap

Northern Large Cap

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Northern Large Cap are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Northern Large is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Northern Mid Cap

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Northern Mid Cap are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Northern Mid may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Pair Trading with Northern Large and Northern Mid

The main advantage of trading using opposite Northern Large and Northern Mid positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Northern Large position performs unexpectedly, Northern Mid 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 Mid will offset losses from the drop in Northern Mid's long position.

The idea behind Northern Large Cap and Northern Mid 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.

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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.