Correlation Between Fauji Foods and Pakistan State

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

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

Diversification Opportunities for Fauji Foods and Pakistan State

0.67

Correlation Coefficient

Fauji Foods  Pakistan State

Poor diversification

The 3 months correlation between Fauji and Pakistan is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding Fauji Foods and Pakistan State Oil in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Pakistan State Oil 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 Pakistan State. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Pakistan State Oil has no effect on the direction of Fauji Foods i.e., Fauji Foods and Pakistan State go up and down completely randomly.

Pair Corralation between Fauji Foods and Pakistan State

Assuming the 90 days trading horizon Fauji Foods is expected to under-perform the Pakistan State. But the stock apears to be less risky and, when comparing its historical volatility, Fauji Foods is 1.16 times less risky than Pakistan State. The stock trades about -0.04 of its potential returns per unit of risk. The Pakistan State Oil is currently generating about -0.02 of returns per unit of risk over similar time horizon. If you would invest  44,462  in Pakistan State Oil on December 28, 2024 and sell it today you would lose (2,386) from holding Pakistan State Oil or give up 5.37% of portfolio value over 90 days.

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

Fauji Foods  vs.  Pakistan State Oil

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 relatively invariable basic indicators, Fauji Foods is not utilizing all of its potentials. The current stock price agitation, may contribute to short-term losses for the retail investors.

Pakistan State Oil

Risk-Adjusted Performance

Very Weak

Over the last 90 days Pakistan State Oil has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable basic indicators, Pakistan State is not utilizing all of its potentials. The recent stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with Fauji Foods and Pakistan State

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

The idea behind Fauji Foods and Pakistan State Oil 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.