Correlation Between Western Forest and Interfor Corp

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

By analyzing existing cross correlation between Western Forest Products and Interfor Corp, you can compare the effects of market volatilities on Western Forest and Interfor Corp 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 Western Forest with a short position of Interfor Corp. Check out your portfolio center. Please also check ongoing floating volatility patterns of Western Forest and Interfor Corp.

Diversification Opportunities for Western Forest and Interfor Corp

0.6

Correlation Coefficient

Western Forest  Interfor Corp

Poor diversification

The 3 months correlation between Western and Interfor is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding Western Forest Products and Interfor Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Interfor Corp and Western Forest 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 Western Forest Products are associated (or correlated) with Interfor Corp. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Interfor Corp has no effect on the direction of Western Forest i.e., Western Forest and Interfor Corp go up and down completely randomly.

Pair Corralation between Western Forest and Interfor Corp

Assuming the 90 days trading horizon Western Forest is expected to generate 9.04 times less return on investment than Interfor Corp. In addition to that, Western Forest is 1.49 times more volatile than Interfor Corp. It trades about 0.01 of its total potential returns per unit of risk. Interfor Corp is currently generating about 0.12 per unit of volatility. If you would invest  1,664  in Interfor Corp on September 5, 2024 and sell it today you would earn a total of  323.00  from holding Interfor Corp or generate 19.41% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.44%
Values	Daily Returns

Western Forest Products  vs.  Interfor Corp

Western Forest Products

Risk-Adjusted Performance

0 of 100

Very Weak

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

Interfor Corp

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Interfor Corp are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, Interfor Corp displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Western Forest and Interfor Corp

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

The idea behind Western Forest Products and Interfor Corp 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.