Correlation Between CF Industries and METHODE ELECTRONICS

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

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

Diversification Opportunities for CF Industries and METHODE ELECTRONICS

0.44

Correlation Coefficient

CF Industries  METHODE ELECTRONICS

Very weak diversification

The 3 months correlation between C4F and METHODE is 0.44. Overlapping area represents the amount of risk that can be diversified away by holding CF Industries Holdings and METHODE ELECTRONICS in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on METHODE ELECTRONICS and CF Industries 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 CF Industries Holdings are associated (or correlated) with METHODE ELECTRONICS. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of METHODE ELECTRONICS has no effect on the direction of CF Industries i.e., CF Industries and METHODE ELECTRONICS go up and down completely randomly.

Pair Corralation between CF Industries and METHODE ELECTRONICS

Assuming the 90 days horizon CF Industries Holdings is expected to generate 0.38 times more return on investment than METHODE ELECTRONICS. However, CF Industries Holdings is 2.64 times less risky than METHODE ELECTRONICS. It trades about 0.04 of its potential returns per unit of risk. METHODE ELECTRONICS is currently generating about -0.03 per unit of risk. If you would invest  7,010  in CF Industries Holdings on September 12, 2024 and sell it today you would earn a total of  1,342  from holding CF Industries Holdings or generate 19.14% return on investment over 90 days.

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

CF Industries Holdings  vs.  METHODE ELECTRONICS

CF Industries Holdings

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in CF Industries Holdings are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain basic indicators, CF Industries reported solid returns over the last few months and may actually be approaching a breakup point.

METHODE ELECTRONICS

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in METHODE ELECTRONICS are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, METHODE ELECTRONICS unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with CF Industries and METHODE ELECTRONICS

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

The idea behind CF Industries Holdings and METHODE ELECTRONICS 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.