Correlation Between Northern Small and Small Cap

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

Diversification Opportunities for Northern Small and Small Cap

0.98

Correlation Coefficient

Northern Small  Small Cap

Almost no diversification

The 3 months correlation between NORTHERN and Small is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding Northern Small Cap and Small Cap Stock in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Stock 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 Small Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Cap Stock has no effect on the direction of Northern Small i.e., Northern Small and Small Cap go up and down completely randomly.

Pair Corralation between Northern Small and Small Cap

Assuming the 90 days horizon Northern Small Cap is expected to generate 1.0 times more return on investment than Small Cap. However, Northern Small is 1.0 times more volatile than Small Cap Stock. It trades about 0.16 of its potential returns per unit of risk. Small Cap Stock is currently generating about 0.13 per unit of risk. If you would invest  1,426  in Northern Small Cap on September 3, 2024 and sell it today you would earn a total of  194.00  from holding Northern Small Cap or generate 13.6% return on investment over 90 days.

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

Northern Small Cap  vs.  Small Cap Stock

Northern Small Cap

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Northern Small Cap are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Northern Small showed solid returns over the last few months and may actually be approaching a breakup point.

Small Cap Stock

Risk-Adjusted Performance

9 of 100

OK

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

Pair Trading with Northern Small and Small Cap

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

The idea behind Northern Small Cap and Small Cap Stock 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.

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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 Equity Analysis module to research over 250,000 global equities including funds, stocks and ETFs to find investment opportunities.