Correlation Between Federal National and Wesfarmers

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

By analyzing existing cross correlation between Federal National Mortgage and Wesfarmers Ltd ADR, you can compare the effects of market volatilities on Federal National and Wesfarmers 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 Federal National with a short position of Wesfarmers. Check out your portfolio center. Please also check ongoing floating volatility patterns of Federal National and Wesfarmers.

Diversification Opportunities for Federal National and Wesfarmers

0.15

Correlation Coefficient

Federal National  Wesfarmers

Average diversification

The 3 months correlation between Federal and Wesfarmers is 0.15. Overlapping area represents the amount of risk that can be diversified away by holding Federal National Mortgage and Wesfarmers Ltd ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Wesfarmers ADR and Federal National 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 Federal National Mortgage are associated (or correlated) with Wesfarmers. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Wesfarmers ADR has no effect on the direction of Federal National i.e., Federal National and Wesfarmers go up and down completely randomly.

Pair Corralation between Federal National and Wesfarmers

Assuming the 90 days horizon Federal National Mortgage is expected to generate 1.03 times more return on investment than Wesfarmers. However, Federal National is 1.03 times more volatile than Wesfarmers Ltd ADR. It trades about 0.13 of its potential returns per unit of risk. Wesfarmers Ltd ADR is currently generating about -0.01 per unit of risk. If you would invest  3,300,000  in Federal National Mortgage on December 1, 2024 and sell it today you would earn a total of  500,000  from holding Federal National Mortgage or generate 15.15% return on investment over 90 days.

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

Federal National Mortgage  vs.  Wesfarmers Ltd ADR

Federal National Mortgage

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Federal National Mortgage are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of very conflicting technical and fundamental indicators, Federal National displayed solid returns over the last few months and may actually be approaching a breakup point.

Wesfarmers ADR

Risk-Adjusted Performance

Very Weak

Over the last 90 days Wesfarmers Ltd ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong technical and fundamental indicators, Wesfarmers is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Federal National and Wesfarmers

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

The idea behind Federal National Mortgage and Wesfarmers Ltd ADR 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.