Correlation Between Fauji Foods and Nestle Pakistan

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

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

Diversification Opportunities for Fauji Foods and Nestle Pakistan

0.26

Correlation Coefficient

Fauji Foods  Nestle Pakistan

Modest diversification

The 3 months correlation between Fauji and Nestle is 0.26. Overlapping area represents the amount of risk that can be diversified away by holding Fauji Foods and Nestle Pakistan in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Nestle Pakistan and Fauji Foods 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 Foods are associated (or correlated) with Nestle Pakistan. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Nestle Pakistan has no effect on the direction of Fauji Foods i.e., Fauji Foods and Nestle Pakistan go up and down completely randomly.

Pair Corralation between Fauji Foods and Nestle Pakistan

Assuming the 90 days trading horizon Fauji Foods is expected to under-perform the Nestle Pakistan. In addition to that, Fauji Foods is 2.46 times more volatile than Nestle Pakistan. It trades about -0.06 of its total potential returns per unit of risk. Nestle Pakistan is currently generating about -0.01 per unit of volatility. If you would invest  745,000  in Nestle Pakistan on December 31, 2024 and sell it today you would lose (7,850) from holding Nestle Pakistan or give up 1.05% of portfolio value over 90 days.

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

Fauji Foods  vs.  Nestle Pakistan

Fauji Foods

Risk-Adjusted Performance

Very Weak

Over the last 90 days Fauji Foods has generated negative risk-adjusted returns adding no value to investors with long positions. Even with latest weak performance, the Stock's basic indicators remain invariable and the latest agitation on Wall Street may also be a sign of long-running gains for the enterprise retail investors.

Nestle Pakistan

Risk-Adjusted Performance

Very Weak

Over the last 90 days Nestle Pakistan has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Nestle Pakistan is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Fauji Foods and Nestle Pakistan

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

The idea behind Fauji Foods and Nestle Pakistan 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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.