Correlation Between Stepan and Modine Manufacturing

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

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

Diversification Opportunities for Stepan and Modine Manufacturing

0.61

Correlation Coefficient

Stepan  Modine Manufacturing

Poor diversification

The 3 months correlation between Stepan and Modine is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding Stepan Company and Modine Manufacturing in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Modine Manufacturing and Stepan 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 Stepan Company are associated (or correlated) with Modine Manufacturing. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Modine Manufacturing has no effect on the direction of Stepan i.e., Stepan and Modine Manufacturing go up and down completely randomly.

Pair Corralation between Stepan and Modine Manufacturing

Considering the 90-day investment horizon Stepan Company is expected to under-perform the Modine Manufacturing. But the stock apears to be less risky and, when comparing its historical volatility, Stepan Company is 2.0 times less risky than Modine Manufacturing. The stock trades about -0.05 of its potential returns per unit of risk. The Modine Manufacturing is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  2,244  in Modine Manufacturing on October 7, 2024 and sell it today you would earn a total of  10,000  from holding Modine Manufacturing or generate 445.63% return on investment over 90 days.

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

Stepan Company  vs.  Modine Manufacturing

Stepan Company

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Stepan Company 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 fundamental indicators remain quite persistent which may send shares a bit higher in February 2025. The latest mess may also be a sign of long-standing up-swing for the company institutional investors.

Modine Manufacturing

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Modine Manufacturing has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, Modine Manufacturing is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Stepan and Modine Manufacturing

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

The idea behind Stepan Company and Modine Manufacturing 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 Insider Screener module to find insiders across different sectors to evaluate their impact on performance.