Can any of the company-specific risk be diversified away by investing in both Northern Trust and Selective Insurance 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 Trust and Selective Insurance into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Northern Trust and Selective Insurance Group, you can compare the effects of market volatilities on Northern Trust and Selective Insurance 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 Trust with a short position of Selective Insurance. Check out your portfolio center. Please also check ongoing floating volatility patterns of Northern Trust and Selective Insurance.
Diversification Opportunities for Northern Trust and Selective Insurance
The 3 months correlation between Northern and Selective is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Northern Trust and Selective Insurance Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Selective Insurance and Northern Trust 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 Trust are associated (or correlated) with Selective Insurance. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Selective Insurance has no effect on the direction of Northern Trust i.e., Northern Trust and Selective Insurance go up and down completely randomly.
Pair Corralation between Northern Trust and Selective Insurance
Assuming the 90 days horizon Northern Trust is expected to under-perform the Selective Insurance. In addition to that, Northern Trust is 1.48 times more volatile than Selective Insurance Group. It trades about -0.12 of its total potential returns per unit of risk. Selective Insurance Group is currently generating about -0.02 per unit of volatility. If you would invest 1,866 in Selective Insurance Group on March 6, 2024 and sell it today you would lose (29.00) from holding Selective Insurance Group or give up 1.55% of portfolio value over 90 days.
Over the last 90 days Northern Trust has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest fragile performance, the Preferred Stock's basic indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.
Over the last 90 days Selective Insurance Group has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable forward indicators, Selective Insurance is not utilizing all of its potentials. The recent stock price agitation, may contribute to short-term losses for the retail investors.