Correlation Between NorAm Drilling and Federal Signal

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

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

Diversification Opportunities for NorAm Drilling and Federal Signal

0.6

Correlation Coefficient

NorAm Drilling  Federal Signal

Poor diversification

The 3 months correlation between NorAm and Federal is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding NorAm Drilling AS and Federal Signal in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Federal Signal and NorAm Drilling 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 NorAm Drilling AS 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 NorAm Drilling i.e., NorAm Drilling and Federal Signal go up and down completely randomly.

Pair Corralation between NorAm Drilling and Federal Signal

Assuming the 90 days trading horizon NorAm Drilling is expected to generate 1.05 times less return on investment than Federal Signal. In addition to that, NorAm Drilling is 1.36 times more volatile than Federal Signal. It trades about 0.1 of its total potential returns per unit of risk. Federal Signal is currently generating about 0.15 per unit of volatility. If you would invest  7,689  in Federal Signal on October 23, 2024 and sell it today you would earn a total of  1,511  from holding Federal Signal or generate 19.65% return on investment over 90 days.

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

NorAm Drilling AS  vs.  Federal Signal

NorAm Drilling AS

Risk-Adjusted Performance

8 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in NorAm Drilling AS are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, NorAm Drilling unveiled solid returns over the last few months and may actually be approaching a breakup point.

Federal Signal

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Federal Signal are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Federal Signal reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with NorAm Drilling and Federal Signal

The main advantage of trading using opposite NorAm Drilling and Federal Signal positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if NorAm Drilling 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 NorAm Drilling AS 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.

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 Piotroski F Score module to get Piotroski F Score based on the binary analysis strategy of nine different fundamentals.