Correlation Between Western Forest and Canfor Pulp

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

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

Diversification Opportunities for Western Forest and Canfor Pulp

0.11

Correlation Coefficient

Western Forest  Canfor Pulp

Average diversification

The 3 months correlation between Western and Canfor is 0.11. Overlapping area represents the amount of risk that can be diversified away by holding Western Forest Products and Canfor Pulp Products in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Canfor Pulp Products and Western Forest 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 Western Forest Products are associated (or correlated) with Canfor Pulp. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Canfor Pulp Products has no effect on the direction of Western Forest i.e., Western Forest and Canfor Pulp go up and down completely randomly.

Pair Corralation between Western Forest and Canfor Pulp

Assuming the 90 days trading horizon Western Forest Products is expected to generate 0.73 times more return on investment than Canfor Pulp. However, Western Forest Products is 1.36 times less risky than Canfor Pulp. It trades about -0.06 of its potential returns per unit of risk. Canfor Pulp Products is currently generating about -0.07 per unit of risk. If you would invest  116.00  in Western Forest Products on December 2, 2024 and sell it today you would lose (71.00) from holding Western Forest Products or give up 61.21% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	99.8%
Values	Daily Returns

Western Forest Products  vs.  Canfor Pulp Products

Western Forest Products

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Western Forest Products are ranked lower than 2 (%) 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.

Canfor Pulp Products

Risk-Adjusted Performance

Very Weak

Over the last 90 days Canfor Pulp Products has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unfluctuating performance, the Stock's basic indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

Pair Trading with Western Forest and Canfor Pulp

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

The idea behind Western Forest Products and Canfor Pulp 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.

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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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.