Correlation Between ARCA Institutional and CF Industries

Can any of the company-specific risk be diversified away by investing in both ARCA Institutional and CF Industries 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 ARCA Institutional and CF Industries into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between ARCA Institutional and CF Industries Holdings, you can compare the effects of market volatilities on ARCA Institutional and CF Industries 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 ARCA Institutional with a short position of CF Industries. Check out your portfolio center. Please also check ongoing floating volatility patterns of ARCA Institutional and CF Industries.

Diversification Opportunities for ARCA Institutional and CF Industries

0.35

Correlation Coefficient

ARCA Institutional  CF Industries

Weak diversification

The 3 months correlation between ARCA and CF Industries is 0.35. Overlapping area represents the amount of risk that can be diversified away by holding ARCA Institutional and CF Industries Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CF Industries Holdings and ARCA Institutional 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 ARCA Institutional are associated (or correlated) with CF Industries. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CF Industries Holdings has no effect on the direction of ARCA Institutional i.e., ARCA Institutional and CF Industries go up and down completely randomly.

Pair Corralation between ARCA Institutional and CF Industries

Assuming the 90 days trading horizon ARCA Institutional is expected to generate 0.56 times more return on investment than CF Industries. However, ARCA Institutional is 1.78 times less risky than CF Industries. It trades about 0.14 of its potential returns per unit of risk. CF Industries Holdings is currently generating about 0.02 per unit of risk. If you would invest  290,400  in ARCA Institutional on September 26, 2024 and sell it today you would earn a total of  22,854  from holding ARCA Institutional or generate 7.87% return on investment over 90 days.

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

ARCA Institutional  vs.  CF Industries Holdings

Pair Trading with ARCA Institutional and CF Industries

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

The idea behind ARCA Institutional and CF Industries 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..