Correlation Between West Fraser and Western Forest
Can any of the company-specific risk be diversified away by investing in both West Fraser and Western Forest 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 West Fraser and Western Forest into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between West Fraser Timber and Western Forest Products, you can compare the effects of market volatilities on West Fraser and Western Forest 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 West Fraser with a short position of Western Forest. Check out your portfolio center. Please also check ongoing floating volatility patterns of West Fraser and Western Forest.
Diversification Opportunities for West Fraser and Western Forest
0.75 | Correlation Coefficient |
Poor diversification
The 3 months correlation between West and Western is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding West Fraser Timber and Western Forest Products in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Western Forest Products and West Fraser 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 West Fraser Timber are associated (or correlated) with Western Forest. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Western Forest Products has no effect on the direction of West Fraser i.e., West Fraser and Western Forest go up and down completely randomly.
Pair Corralation between West Fraser and Western Forest
Assuming the 90 days trading horizon West Fraser Timber is expected to generate 0.6 times more return on investment than Western Forest. However, West Fraser Timber is 1.66 times less risky than Western Forest. It trades about 0.08 of its potential returns per unit of risk. Western Forest Products is currently generating about -0.04 per unit of risk. If you would invest 9,169 in West Fraser Timber on August 25, 2024 and sell it today you would earn a total of 4,022 from holding West Fraser Timber or generate 43.87% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
West Fraser Timber vs. Western Forest Products
Performance |
| Timeline |
| West Fraser Timber |
| Western Forest Products |
West Fraser and Western Forest Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with West Fraser and Western Forest
The main advantage of trading using opposite West Fraser and Western Forest positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if West Fraser position performs unexpectedly, Western Forest 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 Western Forest will offset losses from the drop in Western Forest's long position.| West Fraser vs. Interfor Corp | West Fraser vs. Canfor | West Fraser vs. Stella Jones | West Fraser vs. Western Forest Products |
| Western Forest vs. Interfor Corp | Western Forest vs. Canfor | Western Forest vs. West Fraser Timber | Western Forest vs. Stella Jones |
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 the USA ETFs module to find actively traded Exchange Traded Funds (ETF) in USA.
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