Correlation Between CHINA CH and Federal Signal

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

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

Diversification Opportunities for CHINA CH and Federal Signal

0.72

Correlation Coefficient

CHINA CH  Federal Signal

Poor diversification

The 3 months correlation between CHINA and Federal is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding CHINA CH VENT and Federal Signal in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Federal Signal and CHINA CH 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 CHINA CH VENT are associated (or correlated) with Federal Signal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Federal Signal has no effect on the direction of CHINA CH i.e., CHINA CH and Federal Signal go up and down completely randomly.

Pair Corralation between CHINA CH and Federal Signal

Assuming the 90 days horizon CHINA CH is expected to generate 1.86 times less return on investment than Federal Signal. In addition to that, CHINA CH is 1.21 times more volatile than Federal Signal. It trades about 0.07 of its total potential returns per unit of risk. Federal Signal is currently generating about 0.17 per unit of volatility. If you would invest  6,290  in Federal Signal on April 20, 2025 and sell it today you would earn a total of  2,610  from holding Federal Signal or generate 41.49% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.44%
Values	Daily Returns

CHINA CH VENT  vs.  Federal Signal

CHINA CH VENT

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in CHINA CH VENT are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, CHINA CH reported solid returns over the last few months and may actually be approaching a breakup point.

Federal Signal

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Federal Signal are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Federal Signal reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with CHINA CH and Federal Signal

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

The idea behind CHINA CH VENT and Federal Signal 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.