Correlation Between Canadian Pacific and Union Pacific

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

By analyzing existing cross correlation between Canadian Pacific Railway and Union Pacific, you can compare the effects of market volatilities on Canadian Pacific and Union Pacific 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 Canadian Pacific with a short position of Union Pacific. Check out your portfolio center. Please also check ongoing floating volatility patterns of Canadian Pacific and Union Pacific.

Diversification Opportunities for Canadian Pacific and Union Pacific

0.79

Correlation Coefficient

Canadian Pacific  Union Pacific

Poor diversification

The 3 months correlation between Canadian and Union is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding Canadian Pacific Railway and Union Pacific in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Union Pacific and Canadian Pacific 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 Canadian Pacific Railway are associated (or correlated) with Union Pacific. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Union Pacific has no effect on the direction of Canadian Pacific i.e., Canadian Pacific and Union Pacific go up and down completely randomly.

Pair Corralation between Canadian Pacific and Union Pacific

Allowing for the 90-day total investment horizon Canadian Pacific is expected to generate 1.62 times less return on investment than Union Pacific. In addition to that, Canadian Pacific is 1.4 times more volatile than Union Pacific. It trades about 0.03 of its total potential returns per unit of risk. Union Pacific is currently generating about 0.06 per unit of volatility. If you would invest  22,654  in Union Pacific on December 28, 2024 and sell it today you would earn a total of  943.00  from holding Union Pacific or generate 4.16% return on investment over 90 days.

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

Canadian Pacific Railway  vs.  Union Pacific

Canadian Pacific Railway

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Canadian Pacific Railway are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable basic indicators, Canadian Pacific is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

Union Pacific

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Union Pacific are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable basic indicators, Union Pacific is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with Canadian Pacific and Union Pacific

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

The idea behind Canadian Pacific Railway and Union Pacific 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 Economic Indicators module to top statistical indicators that provide insights into how an economy is performing.