Correlation Between Federal Signal and Advanced Emissions

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

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

Diversification Opportunities for Federal Signal and Advanced Emissions

0.81

Correlation Coefficient

Federal Signal  Advanced Emissions

Very poor diversification

The 3 months correlation between Federal and Advanced is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Federal Signal and Advanced Emissions Solutions in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Advanced Emissions and Federal Signal 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 Federal Signal are associated (or correlated) with Advanced Emissions. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Advanced Emissions has no effect on the direction of Federal Signal i.e., Federal Signal and Advanced Emissions go up and down completely randomly.

Pair Corralation between Federal Signal and Advanced Emissions

Considering the 90-day investment horizon Federal Signal is expected to generate 2.2 times less return on investment than Advanced Emissions. But when comparing it to its historical volatility, Federal Signal is 3.83 times less risky than Advanced Emissions. It trades about 0.14 of its potential returns per unit of risk. Advanced Emissions Solutions is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  186.00  in Advanced Emissions Solutions on January 18, 2024 and sell it today you would earn a total of  145.00  from holding Advanced Emissions Solutions or generate 77.96% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	79.44%
Values	Daily Returns

Federal Signal  vs.  Advanced Emissions Solutions

Federal Signal

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Federal Signal are ranked lower than 11 (%) 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.

Advanced Emissions

Risk-Adjusted Performance

0 of 100

Solid

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.

Pair Trading with Federal Signal and Advanced Emissions

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

The idea behind Federal Signal and Advanced Emissions Solutions 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 Companies Directory module to evaluate performance of over 100,000 Stocks, Funds, and ETFs against different fundamentals.