Correlation Between Fancy Wood and East Coast

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

By analyzing existing cross correlation between Fancy Wood Industries and East Coast Furnitech, you can compare the effects of market volatilities on Fancy Wood and East Coast 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 Fancy Wood with a short position of East Coast. Check out your portfolio center. Please also check ongoing floating volatility patterns of Fancy Wood and East Coast.

Diversification Opportunities for Fancy Wood and East Coast

0.87

Correlation Coefficient

Fancy Wood  East Coast

Very poor diversification

The 3 months correlation between Fancy and East is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Fancy Wood Industries and East Coast Furnitech in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on East Coast Furnitech and Fancy Wood 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 Fancy Wood Industries are associated (or correlated) with East Coast. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of East Coast Furnitech has no effect on the direction of Fancy Wood i.e., Fancy Wood and East Coast go up and down completely randomly.

Pair Corralation between Fancy Wood and East Coast

Assuming the 90 days trading horizon Fancy Wood is expected to generate 1.0 times less return on investment than East Coast. But when comparing it to its historical volatility, Fancy Wood Industries is 1.01 times less risky than East Coast. It trades about 0.11 of its potential returns per unit of risk. East Coast Furnitech is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  48.00  in East Coast Furnitech on August 31, 2024 and sell it today you would lose (4.00) from holding East Coast Furnitech or give up 8.33% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.41%
Values	Daily Returns

Fancy Wood Industries  vs.  East Coast Furnitech

Fancy Wood Industries

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Fancy Wood Industries are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak fundamental drivers, Fancy Wood sustained solid returns over the last few months and may actually be approaching a breakup point.

East Coast Furnitech

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in East Coast Furnitech are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite quite conflicting technical and fundamental indicators, East Coast disclosed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Fancy Wood and East Coast

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

The idea behind Fancy Wood Industries and East Coast Furnitech 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.