Correlation Between Cato and Big 5

Can any of the company-specific risk be diversified away by investing in both Cato and Big 5 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 Cato and Big 5 into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Cato Corporation and Big 5 Sporting, you can compare the effects of market volatilities on Cato and Big 5 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 Cato with a short position of Big 5. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cato and Big 5.

Diversification Opportunities for Cato and Big 5

0.72

Correlation Coefficient

Cato  Big 5

Poor diversification

The 3 months correlation between Cato and Big is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Cato Corp. and Big 5 Sporting in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Big 5 Sporting and Cato 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 Cato Corporation are associated (or correlated) with Big 5. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Big 5 Sporting has no effect on the direction of Cato i.e., Cato and Big 5 go up and down completely randomly.

Pair Corralation between Cato and Big 5

Given the investment horizon of 90 days Cato Corporation is expected to generate 0.85 times more return on investment than Big 5. However, Cato Corporation is 1.18 times less risky than Big 5. It trades about -0.02 of its potential returns per unit of risk. Big 5 Sporting is currently generating about -0.19 per unit of risk. If you would invest  625.00  in Cato Corporation on February 24, 2024 and sell it today you would lose (47.00) from holding Cato Corporation or give up 7.52% of portfolio value over 90 days.

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

Cato Corp.  vs.  Big 5 Sporting

Cato

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Cato Corporation has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Cato is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Big 5 Sporting

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Big 5 Sporting has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's technical and fundamental indicators remain fairly stable which may send shares a bit higher in June 2024. The latest fuss may also be a sign of long-term up-swing for the venture sophisticated investors.

Pair Trading with Cato and Big 5

The main advantage of trading using opposite Cato and Big 5 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Cato position performs unexpectedly, Big 5 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 Big 5 will offset losses from the drop in Big 5's long position.

The idea behind Cato Corporation and Big 5 Sporting 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 Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.