Correlation Between Northern Small and American Beacon

Can any of the company-specific risk be diversified away by investing in both Northern Small and American Beacon 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 American Beacon 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 American Beacon Large, you can compare the effects of market volatilities on Northern Small and American Beacon 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 American Beacon. Check out your portfolio center. Please also check ongoing floating volatility patterns of Northern Small and American Beacon.

Diversification Opportunities for Northern Small and American Beacon

0.66

Correlation Coefficient

Northern Small  American Beacon

Poor diversification

The 3 months correlation between Northern and American is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding Northern Small Cap and American Beacon Large in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Beacon Large 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 American Beacon. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Beacon Large has no effect on the direction of Northern Small i.e., Northern Small and American Beacon go up and down completely randomly.

Pair Corralation between Northern Small and American Beacon

Assuming the 90 days horizon Northern Small Cap is expected to generate 1.95 times more return on investment than American Beacon. However, Northern Small is 1.95 times more volatile than American Beacon Large. It trades about 0.12 of its potential returns per unit of risk. American Beacon Large is currently generating about 0.18 per unit of risk. If you would invest  2,034  in Northern Small Cap on September 5, 2024 and sell it today you would earn a total of  199.00  from holding Northern Small Cap or generate 9.78% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.44%
Values	Daily Returns

Northern Small Cap  vs.  American Beacon Large

Northern Small Cap

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Northern Small Cap are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, Northern Small may actually be approaching a critical reversion point that can send shares even higher in January 2025.

American Beacon Large

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in American Beacon Large are ranked lower than 14 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, American Beacon may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Northern Small and American Beacon

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

The idea behind Northern Small Cap and American Beacon Large 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 Companies Directory module to evaluate performance of over 100,000 Stocks, Funds, and ETFs against different fundamentals.