Correlation Between Freightcar America and Allison Transmission

Can any of the company-specific risk be diversified away by investing in both Freightcar America and Allison Transmission 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 Freightcar America and Allison Transmission into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Freightcar America and Allison Transmission Holdings, you can compare the effects of market volatilities on Freightcar America and Allison Transmission 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 Freightcar America with a short position of Allison Transmission. Check out your portfolio center. Please also check ongoing floating volatility patterns of Freightcar America and Allison Transmission.

Diversification Opportunities for Freightcar America and Allison Transmission

-0.37

Correlation Coefficient

Freightcar America  Allison Transmission

Very good diversification

The 3 months correlation between Freightcar and Allison is -0.37. Overlapping area represents the amount of risk that can be diversified away by holding Freightcar America and Allison Transmission Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Allison Transmission and Freightcar America 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 Freightcar America are associated (or correlated) with Allison Transmission. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Allison Transmission has no effect on the direction of Freightcar America i.e., Freightcar America and Allison Transmission go up and down completely randomly.

Pair Corralation between Freightcar America and Allison Transmission

Given the investment horizon of 90 days Freightcar America is expected to generate 2.63 times more return on investment than Allison Transmission. However, Freightcar America is 2.63 times more volatile than Allison Transmission Holdings. It trades about 0.12 of its potential returns per unit of risk. Allison Transmission Holdings is currently generating about 0.12 per unit of risk. If you would invest  265.00  in Freightcar America on October 5, 2024 and sell it today you would earn a total of  756.00  from holding Freightcar America or generate 285.28% return on investment over 90 days.

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

Freightcar America  vs.  Allison Transmission Holdings

Freightcar America

Risk-Adjusted Performance

0 of 100

Very Weak

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

Allison Transmission

Risk-Adjusted Performance

7 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Allison Transmission Holdings are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of very weak basic indicators, Allison Transmission may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Freightcar America and Allison Transmission

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

The idea behind Freightcar America and Allison Transmission Holdings 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.

Check out your portfolio center.

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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.