Correlation Between Energy Recovery and Federal Signal

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

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

Diversification Opportunities for Energy Recovery and Federal Signal

-0.77

Correlation Coefficient

Energy Recovery  Federal Signal

Pay attention - limited upside

The 3 months correlation between Energy and Federal is -0.77. Overlapping area represents the amount of risk that can be diversified away by holding Energy Recovery and Federal Signal in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Federal Signal and Energy Recovery 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 Energy Recovery are associated (or correlated) with Federal Signal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Federal Signal has no effect on the direction of Energy Recovery i.e., Energy Recovery and Federal Signal go up and down completely randomly.

Pair Corralation between Energy Recovery and Federal Signal

Given the investment horizon of 90 days Energy Recovery is expected to generate 0.87 times more return on investment than Federal Signal. However, Energy Recovery is 1.15 times less risky than Federal Signal. It trades about 0.09 of its potential returns per unit of risk. Federal Signal is currently generating about -0.1 per unit of risk. If you would invest  1,472  in Energy Recovery on December 29, 2024 and sell it today you would earn a total of  146.00  from holding Energy Recovery or generate 9.92% return on investment over 90 days.

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

Energy Recovery  vs.  Federal Signal

Energy Recovery

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Energy Recovery are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite fairly uncertain forward indicators, Energy Recovery may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Federal Signal

Risk-Adjusted Performance

Very Weak

Over the last 90 days Federal Signal has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of inconsistent performance in the last few months, the Stock's basic indicators remain comparatively stable which may send shares a bit higher in April 2025. The newest uproar may also be a sign of mid-term up-swing for the firm private investors.

Pair Trading with Energy Recovery and Federal Signal

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

The idea behind Energy Recovery and Federal Signal 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.