Correlation Between Choice Hotels and Federal Agricultural

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

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

Diversification Opportunities for Choice Hotels and Federal Agricultural

0.93

Correlation Coefficient

Choice Hotels  Federal Agricultural

Almost no diversification

The 3 months correlation between Choice and Federal is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Choice Hotels International and Federal Agricultural Mortgage in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Federal Agricultural and Choice Hotels 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 Choice Hotels International are associated (or correlated) with Federal Agricultural. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Federal Agricultural has no effect on the direction of Choice Hotels i.e., Choice Hotels and Federal Agricultural go up and down completely randomly.

Pair Corralation between Choice Hotels and Federal Agricultural

Assuming the 90 days horizon Choice Hotels International is expected to under-perform the Federal Agricultural. But the stock apears to be less risky and, when comparing its historical volatility, Choice Hotels International is 1.33 times less risky than Federal Agricultural. The stock trades about -0.2 of its potential returns per unit of risk. The Federal Agricultural Mortgage is currently generating about -0.04 of returns per unit of risk over similar time horizon. If you would invest  19,464  in Federal Agricultural Mortgage on September 25, 2024 and sell it today you would lose (364.00) from holding Federal Agricultural Mortgage or give up 1.87% of portfolio value over 90 days.

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

Choice Hotels International  vs.  Federal Agricultural Mortgage

Choice Hotels Intern

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Choice Hotels International are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Choice Hotels reported solid returns over the last few months and may actually be approaching a breakup point.

Federal Agricultural

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Federal Agricultural Mortgage are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Federal Agricultural reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Choice Hotels and Federal Agricultural

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

The idea behind Choice Hotels International and Federal Agricultural Mortgage 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 Portfolio Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.