Correlation Between Freightcar America and Canadian Pacific

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

By analyzing existing cross correlation between Freightcar America and Canadian Pacific Railway, you can compare the effects of market volatilities on Freightcar America and Canadian Pacific 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 Canadian Pacific. Check out your portfolio center. Please also check ongoing floating volatility patterns of Freightcar America and Canadian Pacific.

Diversification Opportunities for Freightcar America and Canadian Pacific

0.6

Correlation Coefficient

Freightcar America  Canadian Pacific

Poor diversification

The 3 months correlation between Freightcar and Canadian is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding Freightcar America and Canadian Pacific Railway in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Canadian Pacific Railway 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 Canadian Pacific. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Canadian Pacific Railway has no effect on the direction of Freightcar America i.e., Freightcar America and Canadian Pacific go up and down completely randomly.

Pair Corralation between Freightcar America and Canadian Pacific

Given the investment horizon of 90 days Freightcar America is expected to under-perform the Canadian Pacific. In addition to that, Freightcar America is 2.74 times more volatile than Canadian Pacific Railway. It trades about -0.06 of its total potential returns per unit of risk. Canadian Pacific Railway is currently generating about 0.03 per unit of volatility. If you would invest  7,645  in Canadian Pacific Railway on November 28, 2024 and sell it today you would earn a total of  127.00  from holding Canadian Pacific Railway or generate 1.66% return on investment over 90 days.

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

Freightcar America  vs.  Canadian Pacific Railway

Freightcar America

Risk-Adjusted Performance

Very Weak

Over the last 90 days Freightcar America has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's forward indicators remain quite persistent which may send shares a bit higher in March 2025. The latest mess may also be a sign of long-standing up-swing for the company institutional investors.

Canadian Pacific Railway

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Canadian Pacific Railway are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable basic indicators, Canadian Pacific 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 Freightcar America and Canadian Pacific

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

The idea behind Freightcar America and Canadian Pacific Railway 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.