Correlation Between Cars and LB Foster

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

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

Diversification Opportunities for Cars and LB Foster

0.86

Correlation Coefficient

Cars  LB Foster

Very poor diversification

The 3 months correlation between Cars and FSTR is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Cars Inc and LB Foster in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LB Foster and Cars 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 Cars Inc are associated (or correlated) with LB Foster. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of LB Foster has no effect on the direction of Cars i.e., Cars and LB Foster go up and down completely randomly.

Pair Corralation between Cars and LB Foster

Given the investment horizon of 90 days Cars Inc is expected to under-perform the LB Foster. In addition to that, Cars is 1.04 times more volatile than LB Foster. It trades about -0.33 of its total potential returns per unit of risk. LB Foster is currently generating about -0.18 per unit of volatility. If you would invest  2,828  in LB Foster on September 24, 2024 and sell it today you would lose (189.00) from holding LB Foster or give up 6.68% of portfolio value over 90 days.

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

Cars Inc  vs.  LB Foster

Cars Inc

Risk-Adjusted Performance

0 of 100

Very Weak

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

LB Foster

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in LB Foster are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak basic indicators, LB Foster reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Cars and LB Foster

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

The idea behind Cars Inc and LB Foster 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.