Correlation Between Advanced Emissions and Federal Signal

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

By analyzing existing cross correlation between Advanced Emissions Solutions and Federal Signal, you can compare the effects of market volatilities on Advanced Emissions and Federal Signal 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 Advanced Emissions with a short position of Federal Signal. Check out your portfolio center. Please also check ongoing floating volatility patterns of Advanced Emissions and Federal Signal.

Diversification Opportunities for Advanced Emissions and Federal Signal

0.72

Correlation Coefficient

Advanced Emissions  Federal Signal

Poor diversification

The 3 months correlation between Advanced and Federal is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Advanced Emissions Solutions and Federal Signal in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Federal Signal and Advanced Emissions 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 Advanced Emissions Solutions are associated (or correlated) with Federal Signal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Federal Signal has no effect on the direction of Advanced Emissions i.e., Advanced Emissions and Federal Signal go up and down completely randomly.

Pair Corralation between Advanced Emissions and Federal Signal

Given the investment horizon of 90 days Advanced Emissions Solutions is expected to generate 4.66 times more return on investment than Federal Signal. However, Advanced Emissions is 4.66 times more volatile than Federal Signal. It trades about 0.2 of its potential returns per unit of risk. Federal Signal is currently generating about 0.11 per unit of risk. If you would invest  302.00  in Advanced Emissions Solutions on January 24, 2024 and sell it today you would earn a total of  29.00  from holding Advanced Emissions Solutions or generate 9.6% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	12.9%
Values	Daily Returns

Advanced Emissions Solutions  vs.  Federal Signal

Advanced Emissions

Risk-Adjusted Performance

0 of 100

Good

Over the last 90 days Advanced Emissions Solutions has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively weak technical and fundamental indicators, Advanced Emissions unveiled solid returns over the last few months and may actually be approaching a breakup point.

Federal Signal

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Federal Signal are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively inconsistent basic indicators, Federal Signal may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Pair Trading with Advanced Emissions and Federal Signal

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

The idea behind Advanced Emissions Solutions and Federal Signal 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.

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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.