Correlation Between United Fire and Lincoln Electric

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

By analyzing existing cross correlation between United Fire Group and Lincoln Electric Holdings, you can compare the effects of market volatilities on United Fire and Lincoln Electric 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 United Fire with a short position of Lincoln Electric. Check out your portfolio center. Please also check ongoing floating volatility patterns of United Fire and Lincoln Electric.

Diversification Opportunities for United Fire and Lincoln Electric

0.21

Correlation Coefficient

United Fire  Lincoln Electric

Modest diversification

The 3 months correlation between United and Lincoln is 0.21. Overlapping area represents the amount of risk that can be diversified away by holding United Fire Group and Lincoln Electric Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lincoln Electric Holdings and United Fire 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 United Fire Group are associated (or correlated) with Lincoln Electric. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lincoln Electric Holdings has no effect on the direction of United Fire i.e., United Fire and Lincoln Electric go up and down completely randomly.

Pair Corralation between United Fire and Lincoln Electric

Given the investment horizon of 90 days United Fire Group is expected to generate 2.09 times more return on investment than Lincoln Electric. However, United Fire is 2.09 times more volatile than Lincoln Electric Holdings. It trades about 0.12 of its potential returns per unit of risk. Lincoln Electric Holdings is currently generating about 0.04 per unit of risk. If you would invest  2,001  in United Fire Group on October 24, 2024 and sell it today you would earn a total of  549.00  from holding United Fire Group or generate 27.44% return on investment over 90 days.

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

United Fire Group  vs.  Lincoln Electric Holdings

United Fire Group

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in United Fire Group are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak fundamental indicators, United Fire unveiled solid returns over the last few months and may actually be approaching a breakup point.

Lincoln Electric Holdings

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Lincoln Electric Holdings are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy fundamental indicators, Lincoln Electric is not utilizing all of its potentials. The newest stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with United Fire and Lincoln Electric

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

The idea behind United Fire Group and Lincoln Electric Holdings 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.