Correlation Between Ford and PACCAR
Can any of the company-specific risk be diversified away by investing in both Ford and PACCAR 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 Ford and PACCAR into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Ford Motor and PACCAR Inc, you can compare the effects of market volatilities on Ford and PACCAR 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 Ford with a short position of PACCAR. Check out your portfolio center. Please also check ongoing floating volatility patterns of Ford and PACCAR.
Diversification Opportunities for Ford and PACCAR
Very poor diversification
The 3 months correlation between Ford and PACCAR is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Ford Motor and PACCAR Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PACCAR Inc and Ford 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 Ford Motor are associated (or correlated) with PACCAR. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of PACCAR Inc has no effect on the direction of Ford i.e., Ford and PACCAR go up and down completely randomly.
Pair Corralation between Ford and PACCAR
Taking into account the 90-day investment horizon Ford Motor is expected to generate 2.21 times more return on investment than PACCAR. However, Ford is 2.21 times more volatile than PACCAR Inc. It trades about 0.09 of its potential returns per unit of risk. PACCAR Inc is currently generating about -0.33 per unit of risk. If you would invest 1,244 in Ford Motor on January 26, 2024 and sell it today you would earn a total of 51.00 from holding Ford Motor or generate 4.1% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Ford Motor vs. PACCAR Inc
Performance |
| Timeline |
| Ford Motor |
| PACCAR Inc |
Ford and PACCAR Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Ford and PACCAR
The main advantage of trading using opposite Ford and PACCAR positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Ford position performs unexpectedly, PACCAR 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 PACCAR will offset losses from the drop in PACCAR's long position.The idea behind Ford Motor and PACCAR Inc 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.| PACCAR vs. Ideanomics | PACCAR vs. American Premium Water | PACCAR vs. Titan International | PACCAR vs. Deere Company |
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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.
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