Correlation Between Federal Signal and Energy

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

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

Diversification Opportunities for Federal Signal and Energy

-0.08

Correlation Coefficient

Federal Signal  Energy

Good diversification

The 3 months correlation between Federal and Energy is -0.08. Overlapping area represents the amount of risk that can be diversified away by holding Federal Signal and Energy and Water in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Energy and Water and Federal Signal 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 Federal Signal are associated (or correlated) with Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Energy and Water has no effect on the direction of Federal Signal i.e., Federal Signal and Energy go up and down completely randomly.

Pair Corralation between Federal Signal and Energy

Considering the 90-day investment horizon Federal Signal is expected to generate 2.78 times less return on investment than Energy. But when comparing it to its historical volatility, Federal Signal is 7.55 times less risky than Energy. It trades about 0.09 of its potential returns per unit of risk. Energy and Water is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  3.00  in Energy and Water on September 21, 2024 and sell it today you would lose (2.65) from holding Energy and Water or give up 88.33% of portfolio value over 90 days.

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

Federal Signal  vs.  Energy and Water

Federal Signal

Risk-Adjusted Performance

0 of 100

Insignificant

Over the last 90 days Federal Signal has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Federal Signal is not utilizing all of its potentials. The recent stock price uproar, may contribute to short-horizon losses for the private investors.

Energy and Water

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Energy and Water has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fragile performance in the last few months, the Stock's basic indicators remain rather sound which may send shares a bit higher in January 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Pair Trading with Federal Signal and Energy

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

The idea behind Federal Signal and Energy and Water 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.