Correlation Between Ford and Southern Michigan

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

By analyzing existing cross correlation between Ford Motor and Southern Michigan Bancorp, you can compare the effects of market volatilities on Ford and Southern Michigan 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 Southern Michigan. Check out your portfolio center. Please also check ongoing floating volatility patterns of Ford and Southern Michigan.

Diversification Opportunities for Ford and Southern Michigan

0.32

Correlation Coefficient

Ford  Southern Michigan

Weak diversification

The 3 months correlation between Ford and Southern is 0.32. Overlapping area represents the amount of risk that can be diversified away by holding Ford Motor and Southern Michigan Bancorp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Southern Michigan Bancorp 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 Southern Michigan. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Southern Michigan Bancorp has no effect on the direction of Ford i.e., Ford and Southern Michigan go up and down completely randomly.

Pair Corralation between Ford and Southern Michigan

Taking into account the 90-day investment horizon Ford is expected to generate 1.95 times less return on investment than Southern Michigan. In addition to that, Ford is 1.47 times more volatile than Southern Michigan Bancorp. It trades about 0.02 of its total potential returns per unit of risk. Southern Michigan Bancorp is currently generating about 0.07 per unit of volatility. If you would invest  1,543  in Southern Michigan Bancorp on September 14, 2024 and sell it today you would earn a total of  382.00  from holding Southern Michigan Bancorp or generate 24.76% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	88.85%
Values	Daily Returns

Ford Motor  vs.  Southern Michigan Bancorp

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 current stock price disturbance, may contribute to mid-run losses for the stockholders.

Southern Michigan Bancorp

Risk-Adjusted Performance

19 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Southern Michigan Bancorp are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile primary indicators, Southern Michigan exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Ford and Southern Michigan

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

The idea behind Ford Motor and Southern Michigan Bancorp 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.