Correlation Between Small Cap and CF Industries

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

By analyzing existing cross correlation between Small Cap Premium and CF Industries Holdings, you can compare the effects of market volatilities on Small Cap and CF Industries 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 Small Cap with a short position of CF Industries. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and CF Industries.

Diversification Opportunities for Small Cap and CF Industries

0.02

Correlation Coefficient

Small Cap  CF Industries

Significant diversification

The 3 months correlation between Small and CF Industries is 0.02. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Premium and CF Industries Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CF Industries Holdings and Small Cap 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 Small Cap Premium are associated (or correlated) with CF Industries. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CF Industries Holdings has no effect on the direction of Small Cap i.e., Small Cap and CF Industries go up and down completely randomly.

Pair Corralation between Small Cap and CF Industries

Considering the 90-day investment horizon Small Cap is expected to generate 3.62 times less return on investment than CF Industries. But when comparing it to its historical volatility, Small Cap Premium is 3.63 times less risky than CF Industries. It trades about 0.08 of its potential returns per unit of risk. CF Industries Holdings is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  7,250  in CF Industries Holdings on September 29, 2024 and sell it today you would earn a total of  1,259  from holding CF Industries Holdings or generate 17.37% return on investment over 90 days.

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

Small Cap Premium  vs.  CF Industries Holdings

Small Cap Premium

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Premium are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound fundamental indicators, Small Cap is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

CF Industries Holdings

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Small Cap and CF Industries

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

The idea behind Small Cap Premium and CF Industries Holdings 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.

Check out your portfolio center.

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.