Correlation Between Johnson Controls and Trex

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

By analyzing existing cross correlation between Johnson Controls International and Trex Company, you can compare the effects of market volatilities on Johnson Controls and Trex 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 Johnson Controls with a short position of Trex. Check out your portfolio center. Please also check ongoing floating volatility patterns of Johnson Controls and Trex.

Diversification Opportunities for Johnson Controls and Trex

0.7

Correlation Coefficient

Johnson Controls  Trex

Poor diversification

The 3 months correlation between Johnson and Trex is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Johnson Controls International and Trex Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Trex Company and Johnson Controls 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 Johnson Controls International are associated (or correlated) with Trex. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Trex Company has no effect on the direction of Johnson Controls i.e., Johnson Controls and Trex go up and down completely randomly.

Pair Corralation between Johnson Controls and Trex

Considering the 90-day investment horizon Johnson Controls is expected to generate 1.19 times less return on investment than Trex. But when comparing it to its historical volatility, Johnson Controls International is 1.39 times less risky than Trex. It trades about 0.19 of its potential returns per unit of risk. Trex Company is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  6,131  in Trex Company on September 1, 2024 and sell it today you would earn a total of  1,372  from holding Trex Company or generate 22.38% return on investment over 90 days.

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

Johnson Controls International  vs.  Trex Company

Johnson Controls Int

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Johnson Controls International are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Despite fairly weak fundamental indicators, Johnson Controls demonstrated solid returns over the last few months and may actually be approaching a breakup point.

Trex Company

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Trex Company are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak technical and fundamental indicators, Trex showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Johnson Controls and Trex

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

The idea behind Johnson Controls International and Trex Company 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.