Correlation Between California Bond and Northern Bond

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

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

Diversification Opportunities for California Bond and Northern Bond

0.48

Correlation Coefficient

California Bond  Northern Bond

Very weak diversification

The 3 months correlation between California and Northern is 0.48. Overlapping area represents the amount of risk that can be diversified away by holding California Bond Fund and Northern Bond Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Bond Index and California Bond 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 California Bond Fund are associated (or correlated) with Northern Bond. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northern Bond Index has no effect on the direction of California Bond i.e., California Bond and Northern Bond go up and down completely randomly.

Pair Corralation between California Bond and Northern Bond

Assuming the 90 days horizon California Bond Fund is expected to generate 0.91 times more return on investment than Northern Bond. However, California Bond Fund is 1.1 times less risky than Northern Bond. It trades about 0.06 of its potential returns per unit of risk. Northern Bond Index is currently generating about -0.09 per unit of risk. If you would invest  1,043  in California Bond Fund on September 5, 2024 and sell it today you would earn a total of  10.00  from holding California Bond Fund or generate 0.96% return on investment over 90 days.

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

California Bond Fund  vs.  Northern Bond Index

California Bond

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in California Bond Fund are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental drivers, California Bond is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Northern Bond Index

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Northern Bond Index has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Northern Bond is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with California Bond and Northern Bond

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

The idea behind California Bond Fund and Northern Bond Index 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.