Correlation Between Supremex and Western Forest

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

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

Diversification Opportunities for Supremex and Western Forest

0.28

Correlation Coefficient

Supremex  Western Forest

Modest diversification

The 3 months correlation between Supremex and Western is 0.28. Overlapping area represents the amount of risk that can be diversified away by holding Supremex and Western Forest Products in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Western Forest Products and Supremex 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 Supremex are associated (or correlated) with Western Forest. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Western Forest Products has no effect on the direction of Supremex i.e., Supremex and Western Forest go up and down completely randomly.

Pair Corralation between Supremex and Western Forest

Assuming the 90 days trading horizon Supremex is expected to under-perform the Western Forest. But the stock apears to be less risky and, when comparing its historical volatility, Supremex is 1.49 times less risky than Western Forest. The stock trades about -0.01 of its potential returns per unit of risk. The Western Forest Products is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  45.00  in Western Forest Products on August 31, 2024 and sell it today you would earn a total of  0.00  from holding Western Forest Products or generate 0.0% return on investment over 90 days.

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

Supremex  vs.  Western Forest Products

Supremex

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Supremex has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Supremex is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Western Forest Products

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Western Forest Products are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy technical and fundamental indicators, Western Forest is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Supremex and Western Forest

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

The idea behind Supremex and Western Forest Products 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.