Correlation Between West Fraser and Algoma Steel

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

By analyzing existing cross correlation between West Fraser Timber and Algoma Steel Group, you can compare the effects of market volatilities on West Fraser and Algoma Steel 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 West Fraser with a short position of Algoma Steel. Check out your portfolio center. Please also check ongoing floating volatility patterns of West Fraser and Algoma Steel.

Diversification Opportunities for West Fraser and Algoma Steel

0.03

Correlation Coefficient

West Fraser  Algoma Steel

Significant diversification

The 3 months correlation between West and Algoma is 0.03. Overlapping area represents the amount of risk that can be diversified away by holding West Fraser Timber and Algoma Steel Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Algoma Steel Group and West Fraser 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 West Fraser Timber are associated (or correlated) with Algoma Steel. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Algoma Steel Group has no effect on the direction of West Fraser i.e., West Fraser and Algoma Steel go up and down completely randomly.

Pair Corralation between West Fraser and Algoma Steel

Assuming the 90 days trading horizon West Fraser Timber is expected to generate 1.19 times more return on investment than Algoma Steel. However, West Fraser is 1.19 times more volatile than Algoma Steel Group. It trades about 0.07 of its potential returns per unit of risk. Algoma Steel Group is currently generating about -0.26 per unit of risk. If you would invest  12,850  in West Fraser Timber on September 13, 2024 and sell it today you would earn a total of  305.00  from holding West Fraser Timber or generate 2.37% return on investment over 90 days.

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

West Fraser Timber  vs.  Algoma Steel Group

West Fraser Timber

Risk-Adjusted Performance

5 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in West Fraser Timber are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating technical and fundamental indicators, West Fraser may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Algoma Steel Group

Risk-Adjusted Performance

2 of 100

Weak

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

Pair Trading with West Fraser and Algoma Steel

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

The idea behind West Fraser Timber and Algoma Steel Group 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 Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.