Correlation Between CF Industries and Nextera Energy

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

By analyzing existing cross correlation between CF Industries Holdings and Nextera Energy, you can compare the effects of market volatilities on CF Industries and Nextera Energy 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 CF Industries with a short position of Nextera Energy. Check out your portfolio center. Please also check ongoing floating volatility patterns of CF Industries and Nextera Energy.

Diversification Opportunities for CF Industries and Nextera Energy

-0.4

Correlation Coefficient

CF Industries  Nextera Energy

Very good diversification

The 3 months correlation between CF Industries and Nextera is -0.4. Overlapping area represents the amount of risk that can be diversified away by holding CF Industries Holdings and Nextera Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Nextera Energy and CF Industries 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 CF Industries Holdings are associated (or correlated) with Nextera Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Nextera Energy has no effect on the direction of CF Industries i.e., CF Industries and Nextera Energy go up and down completely randomly.

Pair Corralation between CF Industries and Nextera Energy

Allowing for the 90-day total investment horizon CF Industries Holdings is expected to generate 2.04 times more return on investment than Nextera Energy. However, CF Industries is 2.04 times more volatile than Nextera Energy. It trades about -0.09 of its potential returns per unit of risk. Nextera Energy is currently generating about -0.31 per unit of risk. If you would invest  8,754  in CF Industries Holdings on September 20, 2024 and sell it today you would lose (311.00) from holding CF Industries Holdings or give up 3.55% of portfolio value over 90 days.

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

CF Industries Holdings  vs.  Nextera Energy

CF Industries Holdings

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in CF Industries Holdings are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable technical and fundamental indicators, CF Industries is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Nextera Energy

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Nextera Energy has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's technical and fundamental indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Pair Trading with CF Industries and Nextera Energy

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

The idea behind CF Industries Holdings and Nextera Energy 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..