Correlation Between LB Foster and Allison Transmission

Can any of the company-specific risk be diversified away by investing in both LB Foster and Allison Transmission 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 LB Foster and Allison Transmission into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between LB Foster and Allison Transmission Holdings, you can compare the effects of market volatilities on LB Foster and Allison Transmission 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 LB Foster with a short position of Allison Transmission. Check out your portfolio center. Please also check ongoing floating volatility patterns of LB Foster and Allison Transmission.

Diversification Opportunities for LB Foster and Allison Transmission

0.75

Correlation Coefficient

LB Foster  Allison Transmission

Poor diversification

The 3 months correlation between FSTR and Allison is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding LB Foster and Allison Transmission Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Allison Transmission and LB Foster 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 LB Foster are associated (or correlated) with Allison Transmission. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Allison Transmission has no effect on the direction of LB Foster i.e., LB Foster and Allison Transmission go up and down completely randomly.

Pair Corralation between LB Foster and Allison Transmission

Given the investment horizon of 90 days LB Foster is expected to generate 1.78 times more return on investment than Allison Transmission. However, LB Foster is 1.78 times more volatile than Allison Transmission Holdings. It trades about 0.39 of its potential returns per unit of risk. Allison Transmission Holdings is currently generating about 0.38 per unit of risk. If you would invest  1,974  in LB Foster on August 26, 2024 and sell it today you would earn a total of  806.00  from holding LB Foster or generate 40.83% return on investment over 90 days.

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

LB Foster  vs.  Allison Transmission Holdings

LB Foster

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in LB Foster are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Even with relatively unfluctuating basic indicators, LB Foster reported solid returns over the last few months and may actually be approaching a breakup point.

Allison Transmission

Risk-Adjusted Performance

20 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Allison Transmission Holdings are ranked lower than 20 (%) of all global equities and portfolios over the last 90 days. In spite of very weak basic indicators, Allison Transmission displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with LB Foster and Allison Transmission

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

The idea behind LB Foster and Allison Transmission Holdings 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 Portfolio Anywhere module to track or share privately all of your investments from the convenience of any device.