Correlation Between Air Canada and Canadian Pacific

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

By analyzing existing cross correlation between Air Canada and Canadian Pacific Railway, you can compare the effects of market volatilities on Air Canada and Canadian Pacific 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 Air Canada with a short position of Canadian Pacific. Check out your portfolio center. Please also check ongoing floating volatility patterns of Air Canada and Canadian Pacific.

Diversification Opportunities for Air Canada and Canadian Pacific

0.14

Correlation Coefficient

Air Canada  Canadian Pacific

Average diversification

The 3 months correlation between Air and Canadian is 0.14. Overlapping area represents the amount of risk that can be diversified away by holding Air Canada and Canadian Pacific Railway in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Canadian Pacific Railway and Air Canada 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 Air Canada are associated (or correlated) with Canadian Pacific. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Canadian Pacific Railway has no effect on the direction of Air Canada i.e., Air Canada and Canadian Pacific go up and down completely randomly.

Pair Corralation between Air Canada and Canadian Pacific

Assuming the 90 days horizon Air Canada is expected to under-perform the Canadian Pacific. In addition to that, Air Canada is 1.48 times more volatile than Canadian Pacific Railway. It trades about -0.06 of its total potential returns per unit of risk. Canadian Pacific Railway is currently generating about 0.02 per unit of volatility. If you would invest  10,192  in Canadian Pacific Railway on March 13, 2024 and sell it today you would earn a total of  371.00  from holding Canadian Pacific Railway or generate 3.64% return on investment over 90 days.

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

Air Canada  vs.  Canadian Pacific Railway

Air Canada

Risk-Adjusted Performance

0 of 100

Very Weak

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

Canadian Pacific Railway

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Canadian Pacific Railway has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unfluctuating performance in the last few months, the Stock's basic indicators remain very healthy which may send shares a bit higher in July 2024. The recent disarray may also be a sign of long period up-swing for the firm investors.

Pair Trading with Air Canada and Canadian Pacific

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

The idea behind Air Canada and Canadian Pacific Railway 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 ETFs module to find actively traded Exchange Traded Funds (ETF) from around the world.