Correlation Between Fortune Brands and AES Corp

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

By analyzing existing cross correlation between Fortune Brands Home and AES Corp, you can compare the effects of market volatilities on Fortune Brands and AES Corp 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 Fortune Brands with a short position of AES Corp. Check out your portfolio center. Please also check ongoing floating volatility patterns of Fortune Brands and AES Corp.

Diversification Opportunities for Fortune Brands and AES Corp

0.8

Correlation Coefficient

Fortune Brands  AES Corp

Very poor diversification

The 3 months correlation between Fortune and AES is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Fortune Brands Home and AES Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AES Corp and Fortune Brands 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 Fortune Brands Home are associated (or correlated) with AES Corp. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of AES Corp has no effect on the direction of Fortune Brands i.e., Fortune Brands and AES Corp go up and down completely randomly.

Pair Corralation between Fortune Brands and AES Corp

Assuming the 90 days trading horizon Fortune Brands Home is expected to under-perform the AES Corp. But the stock apears to be less risky and, when comparing its historical volatility, Fortune Brands Home is 1.13 times less risky than AES Corp. The stock trades about -0.41 of its potential returns per unit of risk. The AES Corp is currently generating about -0.25 of returns per unit of risk over similar time horizon. If you would invest  1,377  in AES Corp on October 10, 2024 and sell it today you would lose (153.00) from holding AES Corp or give up 11.11% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	71.43%
Values	Daily Returns

Fortune Brands Home  vs.  AES Corp

Fortune Brands Home

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Fortune Brands Home has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unsteady performance in the last few months, the Stock's basic indicators remain comparatively stable which may send shares a bit higher in February 2025. The newest uproar may also be a sign of mid-term up-swing for the firm private investors.

AES Corp

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days AES Corp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unsteady performance in the last few months, the Stock's basic indicators remain comparatively stable which may send shares a bit higher in February 2025. The newest uproar may also be a sign of mid-term up-swing for the firm private investors.

Pair Trading with Fortune Brands and AES Corp

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

The idea behind Fortune Brands Home and AES Corp 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.