Correlation Between Federal Agricultural and Watsco

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

By analyzing existing cross correlation between Federal Agricultural Mortgage and Watsco Inc, you can compare the effects of market volatilities on Federal Agricultural and Watsco 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 Federal Agricultural with a short position of Watsco. Check out your portfolio center. Please also check ongoing floating volatility patterns of Federal Agricultural and Watsco.

Diversification Opportunities for Federal Agricultural and Watsco

0.27

Correlation Coefficient

Federal Agricultural  Watsco

Modest diversification

The 3 months correlation between Federal and Watsco is 0.27. Overlapping area represents the amount of risk that can be diversified away by holding Federal Agricultural Mortgage and Watsco Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Watsco Inc and Federal Agricultural 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 Federal Agricultural Mortgage are associated (or correlated) with Watsco. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Watsco Inc has no effect on the direction of Federal Agricultural i.e., Federal Agricultural and Watsco go up and down completely randomly.

Pair Corralation between Federal Agricultural and Watsco

Assuming the 90 days horizon Federal Agricultural Mortgage is expected to under-perform the Watsco. But the stock apears to be less risky and, when comparing its historical volatility, Federal Agricultural Mortgage is 1.22 times less risky than Watsco. The stock trades about -0.07 of its potential returns per unit of risk. The Watsco Inc is currently generating about 0.0 of returns per unit of risk over similar time horizon. If you would invest  46,415  in Watsco Inc on December 22, 2024 and sell it today you would lose (665.00) from holding Watsco Inc or give up 1.43% of portfolio value over 90 days.

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

Federal Agricultural Mortgage  vs.  Watsco Inc

Federal Agricultural

Risk-Adjusted Performance

Very Weak

Over the last 90 days Federal Agricultural Mortgage has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Watsco Inc

Risk-Adjusted Performance

Very Weak

Over the last 90 days Watsco Inc has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Watsco is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Federal Agricultural and Watsco

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

The idea behind Federal Agricultural Mortgage and Watsco Inc 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.