Correlation Between CF Industries and Small Cap

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

Diversification Opportunities for CF Industries and Small Cap

0.02

Correlation Coefficient

CF Industries  Small Cap

Significant diversification

The 3 months correlation between CF Industries and Small is 0.02. Overlapping area represents the amount of risk that can be diversified away by holding CF Industries Holdings and Small Cap Premium in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Premium 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 Small Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Cap Premium has no effect on the direction of CF Industries i.e., CF Industries and Small Cap go up and down completely randomly.

Pair Corralation between CF Industries and Small Cap

Allowing for the 90-day total investment horizon CF Industries Holdings is expected to generate 3.63 times more return on investment than Small Cap. However, CF Industries is 3.63 times more volatile than Small Cap Premium. It trades about 0.08 of its potential returns per unit of risk. Small Cap Premium is currently generating about 0.08 per unit of risk. If you would invest  7,250  in CF Industries Holdings on September 29, 2024 and sell it today you would earn a total of  1,259  from holding CF Industries Holdings or generate 17.37% return on investment over 90 days.

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

CF Industries Holdings  vs.  Small Cap Premium

CF Industries Holdings

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days CF Industries Holdings has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable technical and fundamental indicators, CF Industries is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

Small Cap Premium

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Premium are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound fundamental indicators, Small Cap is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with CF Industries and Small Cap

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

The idea behind CF Industries Holdings and Small Cap Premium 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 Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.