Correlation Between KOT Addu and Fauji Foods

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

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

Diversification Opportunities for KOT Addu and Fauji Foods

0.21

Correlation Coefficient

KOT Addu  Fauji Foods

Modest diversification

The 3 months correlation between KOT and Fauji is 0.21. Overlapping area represents the amount of risk that can be diversified away by holding KOT Addu Power and Fauji Foods in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Fauji Foods and KOT Addu 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 KOT Addu Power are associated (or correlated) with Fauji Foods. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Fauji Foods has no effect on the direction of KOT Addu i.e., KOT Addu and Fauji Foods go up and down completely randomly.

Pair Corralation between KOT Addu and Fauji Foods

Assuming the 90 days trading horizon KOT Addu Power is expected to generate 0.4 times more return on investment than Fauji Foods. However, KOT Addu Power is 2.53 times less risky than Fauji Foods. It trades about 0.04 of its potential returns per unit of risk. Fauji Foods is currently generating about -0.03 per unit of risk. If you would invest  3,311  in KOT Addu Power on December 30, 2024 and sell it today you would earn a total of  71.00  from holding KOT Addu Power or generate 2.14% return on investment over 90 days.

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

KOT Addu Power  vs.  Fauji Foods

KOT Addu Power

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in KOT Addu Power are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite quite persistent basic indicators, KOT Addu is not utilizing all of its potentials. The latest stock price mess, may contribute to short-term losses for the institutional investors.

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 latest stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with KOT Addu and Fauji Foods

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

The idea behind KOT Addu Power and Fauji Foods 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.