Correlation Between CF Industries and Talen Energy

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

Diversification Opportunities for CF Industries and Talen Energy

0.47

Correlation Coefficient

CF Industries  Talen Energy

Very weak diversification

The 3 months correlation between CF Industries and Talen is 0.47. Overlapping area represents the amount of risk that can be diversified away by holding CF Industries Holdings and Talen Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Talen Energy 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 Talen Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Talen Energy has no effect on the direction of CF Industries i.e., CF Industries and Talen Energy go up and down completely randomly.

Pair Corralation between CF Industries and Talen Energy

Allowing for the 90-day total investment horizon CF Industries Holdings is expected to generate 0.64 times more return on investment than Talen Energy. However, CF Industries Holdings is 1.55 times less risky than Talen Energy. It trades about -0.09 of its potential returns per unit of risk. Talen Energy is currently generating about -0.08 per unit of risk. If you would invest  8,814  in CF Industries Holdings on September 27, 2024 and sell it today you would lose (307.00) from holding CF Industries Holdings or give up 3.48% of portfolio value over 90 days.

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

CF Industries Holdings  vs.  Talen Energy

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 current stock price disturbance, may contribute to mid-run losses for the stockholders.

Talen Energy

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Talen Energy are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of very weak essential indicators, Talen Energy displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with CF Industries and Talen Energy

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

The idea behind CF Industries Holdings and Talen Energy 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..