Correlation Between Ford and North American

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

By analyzing existing cross correlation between Ford Motor and North American Financial, you can compare the effects of market volatilities on Ford and North American 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 North American. Check out your portfolio center. Please also check ongoing floating volatility patterns of Ford and North American.

Diversification Opportunities for Ford and North American

-0.06

Correlation Coefficient

Ford  North American

Good diversification

The 3 months correlation between Ford and North is -0.06. Overlapping area represents the amount of risk that can be diversified away by holding Ford Motor and North American Financial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on North American Financial 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 North American. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of North American Financial has no effect on the direction of Ford i.e., Ford and North American go up and down completely randomly.

Pair Corralation between Ford and North American

Taking into account the 90-day investment horizon Ford Motor is expected to under-perform the North American. In addition to that, Ford is 8.92 times more volatile than North American Financial. It trades about -0.03 of its total potential returns per unit of risk. North American Financial is currently generating about 0.52 per unit of volatility. If you would invest  1,005  in North American Financial on September 26, 2024 and sell it today you would earn a total of  76.00  from holding North American Financial or generate 7.56% 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.  North American Financial

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.

North American Financial

Risk-Adjusted Performance

40 of 100

Very Strong

Compared to the overall equity markets, risk-adjusted returns on investments in North American Financial are ranked lower than 40 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, North American may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Ford and North American

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

The idea behind Ford Motor and North American Financial 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.