Correlation Between Fancy Wood and Eastern Commercial

Can any of the company-specific risk be diversified away by investing in both Fancy Wood and Eastern Commercial 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 Eastern Commercial 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 Eastern Commercial Leasing, you can compare the effects of market volatilities on Fancy Wood and Eastern Commercial 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 Eastern Commercial. Check out your portfolio center. Please also check ongoing floating volatility patterns of Fancy Wood and Eastern Commercial.

Diversification Opportunities for Fancy Wood and Eastern Commercial

0.36

Correlation Coefficient

Fancy Wood  Eastern Commercial

Weak diversification

The 3 months correlation between Fancy and Eastern is 0.36. Overlapping area represents the amount of risk that can be diversified away by holding Fancy Wood Industries and Eastern Commercial Leasing in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Eastern Commercial 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 Eastern Commercial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Eastern Commercial has no effect on the direction of Fancy Wood i.e., Fancy Wood and Eastern Commercial go up and down completely randomly.

Pair Corralation between Fancy Wood and Eastern Commercial

Assuming the 90 days trading horizon Fancy Wood Industries is expected to under-perform the Eastern Commercial. In addition to that, Fancy Wood is 1.2 times more volatile than Eastern Commercial Leasing. It trades about -0.1 of its total potential returns per unit of risk. Eastern Commercial Leasing is currently generating about -0.08 per unit of volatility. If you would invest  95.00  in Eastern Commercial Leasing on November 30, 2024 and sell it today you would lose (13.00) from holding Eastern Commercial Leasing or give up 13.68% of portfolio value over 90 days.

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

Fancy Wood Industries  vs.  Eastern Commercial Leasing

Fancy Wood Industries

Risk-Adjusted Performance

Very Weak

Over the last 90 days Fancy Wood Industries has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's fundamental drivers remain somewhat strong which may send shares a bit higher in March 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Eastern Commercial

Risk-Adjusted Performance

Very Weak

Over the last 90 days Eastern Commercial Leasing has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's essential indicators remain quite persistent which may send shares a bit higher in March 2025. The latest mess may also be a sign of long-standing up-swing for the company institutional investors.

Pair Trading with Fancy Wood and Eastern Commercial

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

The idea behind Fancy Wood Industries and Eastern Commercial Leasing 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.