Correlation Between North American and Maple Leaf

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

By analyzing existing cross correlation between North American Financial and Maple Leaf Foods, you can compare the effects of market volatilities on North American and Maple Leaf 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 North American with a short position of Maple Leaf. Check out your portfolio center. Please also check ongoing floating volatility patterns of North American and Maple Leaf.

Diversification Opportunities for North American and Maple Leaf

0.48

Correlation Coefficient

North American  Maple Leaf

Very weak diversification

The 3 months correlation between North and Maple is 0.48. Overlapping area represents the amount of risk that can be diversified away by holding North American Financial and Maple Leaf Foods in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Maple Leaf Foods and North American 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 North American Financial are associated (or correlated) with Maple Leaf. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Maple Leaf Foods has no effect on the direction of North American i.e., North American and Maple Leaf go up and down completely randomly.

Pair Corralation between North American and Maple Leaf

Assuming the 90 days trading horizon North American Financial is expected to generate 0.77 times more return on investment than Maple Leaf. However, North American Financial is 1.3 times less risky than Maple Leaf. It trades about -0.03 of its potential returns per unit of risk. Maple Leaf Foods is currently generating about -0.13 per unit of risk. If you would invest  724.00  in North American Financial on September 19, 2024 and sell it today you would lose (7.00) from holding North American Financial or give up 0.97% of portfolio value over 90 days.

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

North American Financial  vs.  Maple Leaf Foods

North American Financial

Risk-Adjusted Performance

21 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in North American Financial are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, North American displayed solid returns over the last few months and may actually be approaching a breakup point.

Maple Leaf Foods

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Maple Leaf Foods has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy forward indicators, Maple Leaf is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with North American and Maple Leaf

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

The idea behind North American Financial and Maple Leaf Foods 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.