Correlation Between Canadian Pacific and Norfolk Southern

Can any of the company-specific risk be diversified away by investing in both Canadian Pacific and Norfolk Southern 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 Norfolk Southern 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 Norfolk Southern, you can compare the effects of market volatilities on Canadian Pacific and Norfolk Southern 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 Norfolk Southern. Check out your portfolio center. Please also check ongoing floating volatility patterns of Canadian Pacific and Norfolk Southern.

Diversification Opportunities for Canadian Pacific and Norfolk Southern

0.74

Correlation Coefficient

Canadian Pacific  Norfolk Southern

Poor diversification

The 3 months correlation between Canadian and Norfolk is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding Canadian Pacific Railway and Norfolk Southern in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Norfolk Southern 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 Norfolk Southern. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Norfolk Southern has no effect on the direction of Canadian Pacific i.e., Canadian Pacific and Norfolk Southern go up and down completely randomly.

Pair Corralation between Canadian Pacific and Norfolk Southern

Allowing for the 90-day total investment horizon Canadian Pacific Railway is expected to generate 0.88 times more return on investment than Norfolk Southern. However, Canadian Pacific Railway is 1.13 times less risky than Norfolk Southern. It trades about -0.19 of its potential returns per unit of risk. Norfolk Southern is currently generating about -0.26 per unit of risk. If you would invest  8,774  in Canadian Pacific Railway on January 19, 2024 and sell it today you would lose (381.00) from holding Canadian Pacific Railway or give up 4.34% of portfolio value over 90 days.

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

Canadian Pacific Railway  vs.  Norfolk Southern

Canadian Pacific Railway

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Canadian Pacific Railway are ranked lower than 7 (%) 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.

Norfolk Southern

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Norfolk Southern are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, Norfolk Southern is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Canadian Pacific and Norfolk Southern

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

The idea behind Canadian Pacific Railway and Norfolk Southern 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.