Correlation Between Northern Small and Telecommunications

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

Diversification Opportunities for Northern Small and Telecommunications

0.45

Correlation Coefficient

Northern Small  Telecommunications

Very weak diversification

The 3 months correlation between Northern and Telecommunications is 0.45. Overlapping area represents the amount of risk that can be diversified away by holding Northern Small Cap and Telecommunications Portfolio F in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Telecommunications 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 Telecommunications. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Telecommunications has no effect on the direction of Northern Small i.e., Northern Small and Telecommunications go up and down completely randomly.

Pair Corralation between Northern Small and Telecommunications

Assuming the 90 days horizon Northern Small Cap is expected to under-perform the Telecommunications. In addition to that, Northern Small is 10.64 times more volatile than Telecommunications Portfolio Fidelity. It trades about -0.28 of its total potential returns per unit of risk. Telecommunications Portfolio Fidelity is currently generating about -0.4 per unit of volatility. If you would invest  5,672  in Telecommunications Portfolio Fidelity on September 25, 2024 and sell it today you would lose (342.00) from holding Telecommunications Portfolio Fidelity or give up 6.03% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	100.0%
Values	Daily Returns

Northern Small Cap  vs.  Telecommunications Portfolio F

Northern Small Cap

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Northern Small Cap has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's technical and fundamental indicators remain fairly strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Telecommunications

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Telecommunications Portfolio Fidelity are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Telecommunications is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Northern Small and Telecommunications

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

The idea behind Northern Small Cap and Telecommunications Portfolio Fidelity 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 Economic Indicators module to top statistical indicators that provide insights into how an economy is performing.