Correlation Between Fauji Fertilizer and Indus

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

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

Diversification Opportunities for Fauji Fertilizer and Indus

0.6

Correlation Coefficient

Fauji Fertilizer  Indus

Poor diversification

The 3 months correlation between Fauji and Indus is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding Fauji Fertilizer and Indus Motor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Indus Motor and Fauji Fertilizer 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 Fauji Fertilizer are associated (or correlated) with Indus. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Indus Motor has no effect on the direction of Fauji Fertilizer i.e., Fauji Fertilizer and Indus go up and down completely randomly.

Pair Corralation between Fauji Fertilizer and Indus

Assuming the 90 days trading horizon Fauji Fertilizer is expected to generate 1.2 times more return on investment than Indus. However, Fauji Fertilizer is 1.2 times more volatile than Indus Motor. It trades about -0.06 of its potential returns per unit of risk. Indus Motor is currently generating about -0.32 per unit of risk. If you would invest  39,911  in Fauji Fertilizer on October 23, 2024 and sell it today you would lose (822.00) from holding Fauji Fertilizer or give up 2.06% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	95.0%
Values	Daily Returns

Fauji Fertilizer  vs.  Indus Motor

Fauji Fertilizer

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Fauji Fertilizer are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak basic indicators, Fauji Fertilizer reported solid returns over the last few months and may actually be approaching a breakup point.

Indus Motor

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Indus Motor are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Indus sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Fauji Fertilizer and Indus

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

The idea behind Fauji Fertilizer and Indus Motor 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.