Correlation Between Mughal Iron and Fauji Fertilizer

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

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

Diversification Opportunities for Mughal Iron and Fauji Fertilizer

-0.38

Correlation Coefficient

Mughal Iron  Fauji Fertilizer

Very good diversification

The 3 months correlation between Mughal and Fauji is -0.38. Overlapping area represents the amount of risk that can be diversified away by holding Mughal Iron Steel and Fauji Fertilizer in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Fauji Fertilizer and Mughal Iron 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 Mughal Iron Steel are associated (or correlated) with Fauji Fertilizer. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Fauji Fertilizer has no effect on the direction of Mughal Iron i.e., Mughal Iron and Fauji Fertilizer go up and down completely randomly.

Pair Corralation between Mughal Iron and Fauji Fertilizer

Assuming the 90 days trading horizon Mughal Iron is expected to generate 1.72 times less return on investment than Fauji Fertilizer. But when comparing it to its historical volatility, Mughal Iron Steel is 1.08 times less risky than Fauji Fertilizer. It trades about 0.29 of its potential returns per unit of risk. Fauji Fertilizer is currently generating about 0.46 of returns per unit of risk over similar time horizon. If you would invest  27,816  in Fauji Fertilizer on September 15, 2024 and sell it today you would earn a total of  12,125  from holding Fauji Fertilizer or generate 43.59% return on investment over 90 days.

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

Mughal Iron Steel  vs.  Fauji Fertilizer

Mughal Iron Steel

Risk-Adjusted Performance

1 of 100

Very Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Mughal Iron Steel are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong technical indicators, Mughal Iron is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Fauji Fertilizer

Risk-Adjusted Performance

32 of 100

Very Strong

Compared to the overall equity markets, risk-adjusted returns on investments in Fauji Fertilizer are ranked lower than 32 (%) of all global equities and portfolios over the last 90 days. Even with relatively conflicting basic indicators, Fauji Fertilizer reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Mughal Iron and Fauji Fertilizer

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

The idea behind Mughal Iron Steel and Fauji Fertilizer 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 Economic Indicators module to top statistical indicators that provide insights into how an economy is performing.