Correlation Between Canadian National and Union Pacific

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

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

Diversification Opportunities for Canadian National and Union Pacific

0.27

Correlation Coefficient

Canadian National  Union Pacific

Modest diversification

The 3 months correlation between Canadian and Union is 0.27. Overlapping area represents the amount of risk that can be diversified away by holding Canadian National Railway and Union Pacific in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Union Pacific and Canadian National 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 Canadian National Railway are associated (or correlated) with Union Pacific. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Union Pacific has no effect on the direction of Canadian National i.e., Canadian National and Union Pacific go up and down completely randomly.

Pair Corralation between Canadian National and Union Pacific

Considering the 90-day investment horizon Canadian National Railway is expected to generate 1.05 times more return on investment than Union Pacific. However, Canadian National is 1.05 times more volatile than Union Pacific. It trades about -0.11 of its potential returns per unit of risk. Union Pacific is currently generating about -0.33 per unit of risk. If you would invest  13,008  in Canadian National Railway on January 18, 2024 and sell it today you would lose (305.00) from holding Canadian National Railway or give up 2.34% of portfolio value over 90 days.

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

Canadian National Railway  vs.  Union Pacific

Canadian National Railway

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Canadian National Railway are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite fairly strong basic indicators, Canadian National is not utilizing all of its potentials. The latest stock price confusion, may contribute to short-horizon losses for the traders.

Union Pacific

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Union Pacific has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable basic indicators, Union Pacific is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with Canadian National and Union Pacific

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

The idea behind Canadian National Railway and Union Pacific 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 Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.