Correlation Between Big 5 and Noodles
Can any of the company-specific risk be diversified away by investing in both Big 5 and Noodles 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 Big 5 and Noodles into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Big 5 Sporting and Noodles Company, you can compare the effects of market volatilities on Big 5 and Noodles 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 Big 5 with a short position of Noodles. Check out your portfolio center. Please also check ongoing floating volatility patterns of Big 5 and Noodles.
Diversification Opportunities for Big 5 and Noodles
Weak diversification
The 3 months correlation between Big and Noodles is 0.37. Overlapping area represents the amount of risk that can be diversified away by holding Big 5 Sporting and Noodles Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Noodles Company and Big 5 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 Big 5 Sporting are associated (or correlated) with Noodles. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Noodles Company has no effect on the direction of Big 5 i.e., Big 5 and Noodles go up and down completely randomly.
Pair Corralation between Big 5 and Noodles
Given the investment horizon of 90 days Big 5 Sporting is expected to generate 0.82 times more return on investment than Noodles. However, Big 5 Sporting is 1.22 times less risky than Noodles. It trades about -0.07 of its potential returns per unit of risk. Noodles Company is currently generating about -0.4 per unit of risk. If you would invest 187.00 in Big 5 Sporting on August 25, 2024 and sell it today you would lose (16.00) from holding Big 5 Sporting or give up 8.56% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Big 5 Sporting vs. Noodles Company
Performance |
| Timeline |
| Big 5 Sporting |
| Noodles Company |
Big 5 and Noodles Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Big 5 and Noodles
The main advantage of trading using opposite Big 5 and Noodles positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Big 5 position performs unexpectedly, Noodles 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 Noodles will offset losses from the drop in Noodles' long position.The idea behind Big 5 Sporting and Noodles Company 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.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 Earnings Calls module to check upcoming earnings announcements updated hourly across public exchanges.
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