Correlation Between Ford and China Steel

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

By analyzing existing cross correlation between Ford Motor and China Steel Corp, you can compare the effects of market volatilities on Ford and China Steel 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 Ford with a short position of China Steel. Check out your portfolio center. Please also check ongoing floating volatility patterns of Ford and China Steel.

Diversification Opportunities for Ford and China Steel

0.76

Correlation Coefficient

Ford  China Steel

Poor diversification

The 3 months correlation between Ford and China is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding Ford Motor and China Steel Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Steel Corp and Ford 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 Ford Motor are associated (or correlated) with China Steel. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Steel Corp has no effect on the direction of Ford i.e., Ford and China Steel go up and down completely randomly.

Pair Corralation between Ford and China Steel

Taking into account the 90-day investment horizon Ford Motor is expected to generate 4.03 times more return on investment than China Steel. However, Ford is 4.03 times more volatile than China Steel Corp. It trades about 0.19 of its potential returns per unit of risk. China Steel Corp is currently generating about -0.52 per unit of risk. If you would invest  974.00  in Ford Motor on October 20, 2024 and sell it today you would earn a total of  44.00  from holding Ford Motor or generate 4.52% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	90.91%
Values	Daily Returns

Ford Motor  vs.  China Steel Corp

Ford Motor

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Ford Motor has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable technical and fundamental indicators, Ford is not utilizing all of its potentials. The recent stock price disturbance, may contribute to mid-run losses for the stockholders.

China Steel Corp

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days China Steel Corp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, China Steel is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Ford and China Steel

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

The idea behind Ford Motor and China Steel Corp 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 Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.