Correlation Between Federal Signal and Fuel Tech

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

By analyzing existing cross correlation between Federal Signal and Fuel Tech, you can compare the effects of market volatilities on Federal Signal and Fuel Tech 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 Fuel Tech. Check out your portfolio center. Please also check ongoing floating volatility patterns of Federal Signal and Fuel Tech.

Diversification Opportunities for Federal Signal and Fuel Tech

-0.34

Correlation Coefficient

Federal Signal  Fuel Tech

Very good diversification

The 3 months correlation between Federal and Fuel is -0.34. Overlapping area represents the amount of risk that can be diversified away by holding Federal Signal and Fuel Tech in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Fuel Tech 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 Fuel Tech. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Fuel Tech has no effect on the direction of Federal Signal i.e., Federal Signal and Fuel Tech go up and down completely randomly.

Pair Corralation between Federal Signal and Fuel Tech

Considering the 90-day investment horizon Federal Signal is expected to under-perform the Fuel Tech. But the stock apears to be less risky and, when comparing its historical volatility, Federal Signal is 1.83 times less risky than Fuel Tech. The stock trades about -0.07 of its potential returns per unit of risk. The Fuel Tech is currently generating about -0.03 of returns per unit of risk over similar time horizon. If you would invest  107.00  in Fuel Tech on November 28, 2024 and sell it today you would lose (8.00) from holding Fuel Tech or give up 7.48% of portfolio value over 90 days.

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

Federal Signal  vs.  Fuel Tech

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. In spite of latest inconsistent performance, the Stock's basic indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

Fuel Tech

Risk-Adjusted Performance

Very Weak

Over the last 90 days Fuel Tech has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent technical and fundamental indicators, Fuel Tech is not utilizing all of its potentials. The newest stock price mess, may contribute to short-term losses for the institutional investors.

Pair Trading with Federal Signal and Fuel Tech

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

The idea behind Federal Signal and Fuel Tech 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.