Correlation Between Pakistan State and Fauji Fertilizer

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

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

Diversification Opportunities for Pakistan State and Fauji Fertilizer

0.96

Correlation Coefficient

Pakistan State  Fauji Fertilizer

Almost no diversification

The 3 months correlation between Pakistan and Fauji is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Pakistan State Oil and Fauji Fertilizer in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Fauji Fertilizer and Pakistan State 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 Pakistan State Oil 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 Pakistan State i.e., Pakistan State and Fauji Fertilizer go up and down completely randomly.

Pair Corralation between Pakistan State and Fauji Fertilizer

Assuming the 90 days trading horizon Pakistan State Oil is expected to generate 0.97 times more return on investment than Fauji Fertilizer. However, Pakistan State Oil is 1.03 times less risky than Fauji Fertilizer. It trades about 0.4 of its potential returns per unit of risk. Fauji Fertilizer is currently generating about 0.38 per unit of risk. If you would invest  15,499  in Pakistan State Oil on September 12, 2024 and sell it today you would earn a total of  15,497  from holding Pakistan State Oil or generate 99.99% return on investment over 90 days.

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

Pakistan State Oil  vs.  Fauji Fertilizer

Pakistan State Oil

Risk-Adjusted Performance

31 of 100

Strong

Compared to the overall equity markets, risk-adjusted returns on investments in Pakistan State Oil are ranked lower than 31 (%) of all global equities and portfolios over the last 90 days. Even with relatively fragile basic indicators, Pakistan State reported solid returns over the last few months and may actually be approaching a breakup point.

Fauji Fertilizer

Risk-Adjusted Performance

29 of 100

Strong

Compared to the overall equity markets, risk-adjusted returns on investments in Fauji Fertilizer are ranked lower than 29 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak basic indicators, Fauji Fertilizer reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Pakistan State and Fauji Fertilizer

The main advantage of trading using opposite Pakistan State and Fauji Fertilizer positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Pakistan State 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 Pakistan State Oil 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.