Correlation Between Algoma Steel and West Fraser

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

By analyzing existing cross correlation between Algoma Steel Group and West Fraser Timber, you can compare the effects of market volatilities on Algoma Steel and West Fraser 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 Algoma Steel with a short position of West Fraser. Check out your portfolio center. Please also check ongoing floating volatility patterns of Algoma Steel and West Fraser.

Diversification Opportunities for Algoma Steel and West Fraser

0.02

Correlation Coefficient

Algoma Steel  West Fraser

Significant diversification

The 3 months correlation between Algoma and West is 0.02. Overlapping area represents the amount of risk that can be diversified away by holding Algoma Steel Group and West Fraser Timber in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on West Fraser Timber and Algoma Steel 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 Algoma Steel Group are associated (or correlated) with West Fraser. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of West Fraser Timber has no effect on the direction of Algoma Steel i.e., Algoma Steel and West Fraser go up and down completely randomly.

Pair Corralation between Algoma Steel and West Fraser

Given the investment horizon of 90 days Algoma Steel is expected to generate 2.09 times less return on investment than West Fraser. In addition to that, Algoma Steel is 1.38 times more volatile than West Fraser Timber. It trades about 0.06 of its total potential returns per unit of risk. West Fraser Timber is currently generating about 0.17 per unit of volatility. If you would invest  11,642  in West Fraser Timber on September 3, 2024 and sell it today you would earn a total of  2,110  from holding West Fraser Timber or generate 18.12% return on investment over 90 days.

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

Algoma Steel Group  vs.  West Fraser Timber

Algoma Steel Group

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Algoma Steel Group are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite quite weak basic indicators, Algoma Steel may actually be approaching a critical reversion point that can send shares even higher in January 2025.

West Fraser Timber

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in West Fraser Timber are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of very conflicting technical and fundamental indicators, West Fraser displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Algoma Steel and West Fraser

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

The idea behind Algoma Steel Group and West Fraser Timber 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.