Correlation Between Fortescue Metals and Encore Wire

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Can any of the company-specific risk be diversified away by investing in both Fortescue Metals and Encore Wire 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 Fortescue Metals and Encore Wire into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Fortescue Metals Group and Encore Wire, you can compare the effects of market volatilities on Fortescue Metals and Encore Wire 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 Fortescue Metals with a short position of Encore Wire. Check out your portfolio center. Please also check ongoing floating volatility patterns of Fortescue Metals and Encore Wire.

Diversification Opportunities for Fortescue Metals and Encore Wire

0.46
  Correlation Coefficient

Very weak diversification

The 3 months correlation between Fortescue and Encore is 0.46. Overlapping area represents the amount of risk that can be diversified away by holding Fortescue Metals Group and Encore Wire in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Encore Wire and Fortescue Metals 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 Fortescue Metals Group are associated (or correlated) with Encore Wire. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Encore Wire has no effect on the direction of Fortescue Metals i.e., Fortescue Metals and Encore Wire go up and down completely randomly.

Pair Corralation between Fortescue Metals and Encore Wire

Assuming the 90 days horizon Fortescue Metals is expected to generate 1.41 times less return on investment than Encore Wire. In addition to that, Fortescue Metals is 1.25 times more volatile than Encore Wire. It trades about 0.34 of its total potential returns per unit of risk. Encore Wire is currently generating about 0.59 per unit of volatility. If you would invest  13,340  in Encore Wire on November 2, 2022 and sell it today you would earn a total of  2,605  from holding Encore Wire or generate 19.53% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthWeak
Accuracy100.0%
ValuesDaily Returns

Fortescue Metals Group  vs.  Encore Wire

 Performance (%) 
       Timeline  
Fortescue Metals 
Fortescue Performance
20 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Fortescue Metals Group are ranked lower than 20 (%) of all global equities and portfolios over the last 90 days. In spite of rather unfluctuating primary indicators, Fortescue Metals exhibited solid returns over the last few months and may actually be approaching a breakup point.

Fortescue Price Channel

Encore Wire 
Encore Performance
11 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Encore Wire are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak basic indicators, Encore Wire exhibited solid returns over the last few months and may actually be approaching a breakup point.

Encore Price Channel

Fortescue Metals and Encore Wire Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Fortescue Metals and Encore Wire

The main advantage of trading using opposite Fortescue Metals and Encore Wire positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Fortescue Metals position performs unexpectedly, Encore Wire 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 Encore Wire will offset losses from the drop in Encore Wire's long position.
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The idea behind Fortescue Metals Group and Encore Wire 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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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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.

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