Correlation Between CECO Environmental and Federal Signal

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

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

Diversification Opportunities for CECO Environmental and Federal Signal

0.9

Correlation Coefficient

CECO Environmental  Federal Signal

Almost no diversification

The 3 months correlation between CECO and Federal is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding CECO Environmental Corp and Federal Signal in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Federal Signal and CECO Environmental 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 CECO Environmental Corp 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 CECO Environmental i.e., CECO Environmental and Federal Signal go up and down completely randomly.

Pair Corralation between CECO Environmental and Federal Signal

Assuming the 90 days horizon CECO Environmental Corp is expected to generate 1.36 times more return on investment than Federal Signal. However, CECO Environmental is 1.36 times more volatile than Federal Signal. It trades about -0.01 of its potential returns per unit of risk. Federal Signal is currently generating about -0.08 per unit of risk. If you would invest  3,054  in CECO Environmental Corp on October 7, 2024 and sell it today you would lose (28.00) from holding CECO Environmental Corp or give up 0.92% of portfolio value over 90 days.

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

CECO Environmental Corp  vs.  Federal Signal

CECO Environmental Corp

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in CECO Environmental Corp are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, CECO Environmental reported solid returns over the last few months and may actually be approaching a breakup point.

Federal Signal

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Federal Signal are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain basic indicators, Federal Signal may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with CECO Environmental and Federal Signal

The main advantage of trading using opposite CECO Environmental and Federal Signal positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if CECO Environmental 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 CECO Environmental Corp 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.