Correlation Between CF Industries and Lavoro Limited

Can any of the company-specific risk be diversified away by investing in both CF Industries and Lavoro Limited 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 Lavoro Limited 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 Lavoro Limited Class, you can compare the effects of market volatilities on CF Industries and Lavoro Limited 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 Lavoro Limited. Check out your portfolio center. Please also check ongoing floating volatility patterns of CF Industries and Lavoro Limited.

Diversification Opportunities for CF Industries and Lavoro Limited

0.21

Correlation Coefficient

CF Industries  Lavoro Limited

Modest diversification

The 3 months correlation between CF Industries and Lavoro is 0.21. Overlapping area represents the amount of risk that can be diversified away by holding CF Industries Holdings and Lavoro Limited Class in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lavoro Limited Class 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 Lavoro Limited. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lavoro Limited Class has no effect on the direction of CF Industries i.e., CF Industries and Lavoro Limited go up and down completely randomly.

Pair Corralation between CF Industries and Lavoro Limited

Allowing for the 90-day total investment horizon CF Industries Holdings is expected to generate 0.32 times more return on investment than Lavoro Limited. However, CF Industries Holdings is 3.1 times less risky than Lavoro Limited. It trades about 0.15 of its potential returns per unit of risk. Lavoro Limited Class is currently generating about 0.03 per unit of risk. If you would invest  7,725  in CF Industries Holdings on September 12, 2024 and sell it today you would earn a total of  1,159  from holding CF Industries Holdings or generate 15.0% return on investment over 90 days.

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

CF Industries Holdings  vs.  Lavoro Limited Class

CF Industries Holdings

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in CF Industries Holdings are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak technical and fundamental indicators, CF Industries reported solid returns over the last few months and may actually be approaching a breakup point.

Lavoro Limited Class

Risk-Adjusted Performance

2 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Lavoro Limited Class are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of very fragile basic indicators, Lavoro Limited may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with CF Industries and Lavoro Limited

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

The idea behind CF Industries Holdings and Lavoro Limited Class 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.

Check out your portfolio center.

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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.