Correlation Between North American and Air Transport

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

By analyzing existing cross correlation between North American Construction and Air Transport Services, you can compare the effects of market volatilities on North American and Air Transport 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 North American with a short position of Air Transport. Check out your portfolio center. Please also check ongoing floating volatility patterns of North American and Air Transport.

Diversification Opportunities for North American and Air Transport

0.86

Correlation Coefficient

North American  Air Transport

Very poor diversification

The 3 months correlation between North and Air is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding North American Construction and Air Transport Services in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Air Transport Services and North American 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 North American Construction are associated (or correlated) with Air Transport. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Air Transport Services has no effect on the direction of North American i.e., North American and Air Transport go up and down completely randomly.

Pair Corralation between North American and Air Transport

Assuming the 90 days horizon North American Construction is expected to generate 5.29 times more return on investment than Air Transport. However, North American is 5.29 times more volatile than Air Transport Services. It trades about 0.17 of its potential returns per unit of risk. Air Transport Services is currently generating about 0.1 per unit of risk. If you would invest  1,780  in North American Construction on September 28, 2024 and sell it today you would earn a total of  150.00  from holding North American Construction or generate 8.43% return on investment over 90 days.

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

North American Construction  vs.  Air Transport Services

North American Const

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in North American Construction are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain basic indicators, North American reported solid returns over the last few months and may actually be approaching a breakup point.

Air Transport Services

Risk-Adjusted Performance

15 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Air Transport Services are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Air Transport reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with North American and Air Transport

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

The idea behind North American Construction and Air Transport 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.