Correlation Between Carsales and CF Industries

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

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

Diversification Opportunities for Carsales and CF Industries

0.29

Correlation Coefficient

Carsales  CF Industries

Modest diversification

The 3 months correlation between Carsales and CF Industries is 0.29. Overlapping area represents the amount of risk that can be diversified away by holding CarsalesCom Ltd ADR and CF Industries Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CF Industries Holdings and Carsales 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 CarsalesCom Ltd ADR are associated (or correlated) with CF Industries. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CF Industries Holdings has no effect on the direction of Carsales i.e., Carsales and CF Industries go up and down completely randomly.

Pair Corralation between Carsales and CF Industries

Assuming the 90 days horizon CarsalesCom Ltd ADR is expected to generate 1.49 times more return on investment than CF Industries. However, Carsales is 1.49 times more volatile than CF Industries Holdings. It trades about -0.02 of its potential returns per unit of risk. CF Industries Holdings is currently generating about -0.05 per unit of risk. If you would invest  4,550  in CarsalesCom Ltd ADR on December 25, 2024 and sell it today you would lose (367.00) from holding CarsalesCom Ltd ADR or give up 8.07% of portfolio value over 90 days.

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

CarsalesCom Ltd ADR  vs.  CF Industries Holdings

CarsalesCom ADR

Risk-Adjusted Performance

Very Weak

Over the last 90 days CarsalesCom Ltd ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Carsales is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

CF Industries Holdings

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Carsales and CF Industries

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

The idea behind CarsalesCom Ltd ADR and CF Industries Holdings 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.

Check out your portfolio center.

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 Share Portfolio module to track or share privately all of your investments from the convenience of any device.