Correlation Between Canadian Pacific and LB Foster

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

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

Diversification Opportunities for Canadian Pacific and LB Foster

0.38

Correlation Coefficient

Canadian Pacific  LB Foster

Weak diversification

The 3 months correlation between Canadian and FSTR is 0.38. Overlapping area represents the amount of risk that can be diversified away by holding Canadian Pacific Railway and LB Foster in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LB Foster and Canadian Pacific 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 Pacific Railway 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 Canadian Pacific i.e., Canadian Pacific and LB Foster go up and down completely randomly.

Pair Corralation between Canadian Pacific and LB Foster

Allowing for the 90-day total investment horizon Canadian Pacific is expected to generate 3.25 times less return on investment than LB Foster. But when comparing it to its historical volatility, Canadian Pacific Railway is 1.57 times less risky than LB Foster. It trades about 0.03 of its potential returns per unit of risk. LB Foster is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  1,407  in LB Foster on January 24, 2024 and sell it today you would earn a total of  1,028  from holding LB Foster or generate 73.06% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	99.8%
Values	Daily Returns

Canadian Pacific Railway  vs.  LB Foster

Canadian Pacific Railway

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Canadian Pacific Railway are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak basic indicators, Canadian Pacific may actually be approaching a critical reversion point that can send shares even higher in May 2024.

LB Foster

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in LB Foster are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Even with relatively unfluctuating basic indicators, LB Foster may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Pair Trading with Canadian Pacific and LB Foster

The main advantage of trading using opposite Canadian Pacific and LB Foster positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Canadian Pacific 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 Canadian Pacific Railway 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 ETF Categories module to list of ETF categories grouped based on various criteria, such as the investment strategy or type of investments.