Correlation Between Ford and Colgate Palmolive

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

By analyzing existing cross correlation between Ford Motor and Colgate Palmolive, you can compare the effects of market volatilities on Ford and Colgate Palmolive 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 Ford with a short position of Colgate Palmolive. Check out your portfolio center. Please also check ongoing floating volatility patterns of Ford and Colgate Palmolive.

Diversification Opportunities for Ford and Colgate Palmolive

-0.2

Correlation Coefficient

Ford  Colgate Palmolive

Good diversification

The 3 months correlation between Ford and Colgate is -0.2. Overlapping area represents the amount of risk that can be diversified away by holding Ford Motor and Colgate Palmolive in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Colgate Palmolive and Ford 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 Ford Motor are associated (or correlated) with Colgate Palmolive. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Colgate Palmolive has no effect on the direction of Ford i.e., Ford and Colgate Palmolive go up and down completely randomly.

Pair Corralation between Ford and Colgate Palmolive

Taking into account the 90-day investment horizon Ford Motor is expected to under-perform the Colgate Palmolive. In addition to that, Ford is 1.62 times more volatile than Colgate Palmolive. It trades about -0.03 of its total potential returns per unit of risk. Colgate Palmolive is currently generating about 0.09 per unit of volatility. If you would invest  153,715  in Colgate Palmolive on September 28, 2024 and sell it today you would earn a total of  29,985  from holding Colgate Palmolive or generate 19.51% return on investment over 90 days.

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

Ford Motor  vs.  Colgate Palmolive

Ford Motor

Risk-Adjusted Performance

0 of 100

Very Weak

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

Colgate Palmolive

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Colgate Palmolive has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's primary indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with Ford and Colgate Palmolive

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

The idea behind Ford Motor and Colgate Palmolive 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 Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.