Correlation Between Wells Fargo and UFP Industries

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

By analyzing existing cross correlation between West Fraser Timber and UFP Industries, you can compare the effects of market volatilities on Wells Fargo and UFP 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 Wells Fargo with a short position of UFP Industries. Check out your portfolio center. Please also check ongoing floating volatility patterns of Wells Fargo and UFP Industries.

Diversification Opportunities for Wells Fargo and UFP Industries

0.89

Correlation Coefficient

Wells Fargo  UFP Industries

Very poor diversification

The 3 months correlation between Wells and UFP is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding West Fraser Timber and UFP Industries in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on UFP Industries and Wells Fargo 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 West Fraser Timber are associated (or correlated) with UFP Industries. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of UFP Industries has no effect on the direction of Wells Fargo i.e., Wells Fargo and UFP Industries go up and down completely randomly.

Pair Corralation between Wells Fargo and UFP Industries

Assuming the 90 days horizon Wells Fargo is expected to generate 1.01 times less return on investment than UFP Industries. But when comparing it to its historical volatility, West Fraser Timber is 1.32 times less risky than UFP Industries. It trades about 0.16 of its potential returns per unit of risk. UFP Industries is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  10,885  in UFP Industries on September 3, 2024 and sell it today you would earn a total of  1,800  from holding UFP Industries or generate 16.54% return on investment over 90 days.

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

West Fraser Timber  vs.  UFP Industries

West Fraser Timber

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in West Fraser Timber are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Wells Fargo reported solid returns over the last few months and may actually be approaching a breakup point.

UFP Industries

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in UFP Industries are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady basic indicators, UFP Industries reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Wells Fargo and UFP Industries

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

The idea behind West Fraser Timber and UFP Industries 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.