Can any of the company-specific risk be diversified away by investing in both DraftKings and Arcos Dorados 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 DraftKings and Arcos Dorados into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between DraftKings and Arcos Dorados Holdings, you can compare the effects of market volatilities on DraftKings and Arcos Dorados 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 DraftKings with a short position of Arcos Dorados. Check out your portfolio center. Please also check ongoing floating volatility patterns of DraftKings and Arcos Dorados.
Diversification Opportunities for DraftKings and Arcos Dorados
The 3 months correlation between DraftKings and Arcos is 0.44. Overlapping area represents the amount of risk that can be diversified away by holding DraftKings and Arcos Dorados Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Arcos Dorados Holdings and DraftKings 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 DraftKings are associated (or correlated) with Arcos Dorados. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Arcos Dorados Holdings has no effect on the direction of DraftKings i.e., DraftKings and Arcos Dorados go up and down completely randomly.
Pair Corralation between DraftKings and Arcos Dorados
Given the investment horizon of 90 days DraftKings is expected to generate 1.46 times more return on investment than Arcos Dorados. However, DraftKings is 1.46 times more volatile than Arcos Dorados Holdings. It trades about 0.12 of its potential returns per unit of risk. Arcos Dorados Holdings is currently generating about 0.09 per unit of risk. If you would invest 1,891 in DraftKings on June 28, 2023 and sell it today you would earn a total of 901.00 from holding DraftKings or generate 47.65% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in DraftKings are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite nearly unfluctuating basic indicators, DraftKings may actually be approaching a critical reversion point that can send shares even higher in October 2023.
Over the last 90 days Arcos Dorados Holdings has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy fundamental indicators, Arcos Dorados is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the insiders.
The main advantage of trading using opposite DraftKings and Arcos Dorados positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if DraftKings position performs unexpectedly, Arcos Dorados 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 Arcos Dorados will offset losses from the drop in Arcos Dorados' long position.
The idea behind DraftKings and Arcos Dorados 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.
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 Stock Screener module to find equities using a custom stock filter or screen asymmetry in trading patterns, price, volume, or investment outlook..
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