Correlation Between Federal Signal and Select Energy

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

By analyzing existing cross correlation between Federal Signal and Select Energy Services, you can compare the effects of market volatilities on Federal Signal and Select Energy 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 Signal with a short position of Select Energy. Check out your portfolio center. Please also check ongoing floating volatility patterns of Federal Signal and Select Energy.

Diversification Opportunities for Federal Signal and Select Energy

0.46

Correlation Coefficient

Federal Signal  Select Energy

Very weak diversification

The 3 months correlation between Federal and Select is 0.46. Overlapping area represents the amount of risk that can be diversified away by holding Federal Signal and Select Energy Services in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Select Energy Services and Federal Signal 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 Signal are associated (or correlated) with Select Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Select Energy Services has no effect on the direction of Federal Signal i.e., Federal Signal and Select Energy go up and down completely randomly.

Pair Corralation between Federal Signal and Select Energy

Assuming the 90 days horizon Federal Signal is expected to under-perform the Select Energy. But the stock apears to be less risky and, when comparing its historical volatility, Federal Signal is 1.57 times less risky than Select Energy. The stock trades about -0.45 of its potential returns per unit of risk. The Select Energy Services is currently generating about -0.06 of returns per unit of risk over similar time horizon. If you would invest  1,197  in Select Energy Services on December 4, 2024 and sell it today you would lose (58.00) from holding Select Energy Services or give up 4.85% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	95.45%
Values	Daily Returns

Federal Signal  vs.  Select Energy Services

Federal Signal

Risk-Adjusted Performance

Very Weak

Over the last 90 days Federal Signal has generated negative risk-adjusted returns adding no value to investors with long positions. Despite uncertain performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Select Energy Services

Risk-Adjusted Performance

Very Weak

Over the last 90 days Select Energy Services has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with Federal Signal and Select Energy

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

The idea behind Federal Signal and Select Energy Services 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.