Correlation Between ScanSource and Federal Signal

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

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

Diversification Opportunities for ScanSource and Federal Signal

0.64

Correlation Coefficient

ScanSource  Federal Signal

Poor diversification

The 3 months correlation between ScanSource and Federal is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding ScanSource and Federal Signal in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Federal Signal and ScanSource 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 ScanSource are associated (or correlated) with Federal Signal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Federal Signal has no effect on the direction of ScanSource i.e., ScanSource and Federal Signal go up and down completely randomly.

Pair Corralation between ScanSource and Federal Signal

Assuming the 90 days horizon ScanSource is expected to under-perform the Federal Signal. In addition to that, ScanSource is 1.08 times more volatile than Federal Signal. It trades about -0.19 of its total potential returns per unit of risk. Federal Signal is currently generating about -0.17 per unit of volatility. If you would invest  8,634  in Federal Signal on December 23, 2024 and sell it today you would lose (1,884) from holding Federal Signal or give up 21.82% of portfolio value over 90 days.

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

ScanSource  vs.  Federal Signal

ScanSource

Risk-Adjusted Performance

Very Weak

Over the last 90 days ScanSource has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Federal Signal

Risk-Adjusted Performance

Very Weak

Over the last 90 days Federal Signal has generated negative risk-adjusted returns adding no value to investors with long positions. Despite uncertain performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with ScanSource and Federal Signal

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

The idea behind ScanSource and Federal Signal 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.