Correlation Between Canadian Pacific and PACCAR

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

Diversification Opportunities for Canadian Pacific and PACCAR

0.82

Correlation Coefficient

Canadian Pacific  PACCAR

Very poor diversification

The 3 months correlation between Canadian and PACCAR is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding Canadian Pacific Railway and PACCAR Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PACCAR Inc 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 PACCAR. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of PACCAR Inc has no effect on the direction of Canadian Pacific i.e., Canadian Pacific and PACCAR go up and down completely randomly.

Pair Corralation between Canadian Pacific and PACCAR

Allowing for the 90-day total investment horizon Canadian Pacific Railway is expected to generate 1.61 times more return on investment than PACCAR. However, Canadian Pacific is 1.61 times more volatile than PACCAR Inc. It trades about -0.16 of its potential returns per unit of risk. PACCAR Inc is currently generating about -0.33 per unit of risk. If you would invest  8,712  in Canadian Pacific Railway on January 26, 2024 and sell it today you would lose (519.00) from holding Canadian Pacific Railway or give up 5.96% of portfolio value over 90 days.

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

Canadian Pacific Railway  vs.  PACCAR Inc

Canadian Pacific Railway

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Canadian Pacific Railway are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable basic indicators, Canadian Pacific is not utilizing all of its potentials. The current stock price agitation, may contribute to short-term losses for the retail investors.

PACCAR Inc

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in PACCAR Inc are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak basic indicators, PACCAR may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Pair Trading with Canadian Pacific and PACCAR

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

The idea behind Canadian Pacific Railway and PACCAR Inc 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..