Correlation Between Dollar Tree and Costco Wholesale

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

By analyzing existing cross correlation between Dollar Tree and Costco Wholesale Corp, you can compare the effects of market volatilities on Dollar Tree and Costco Wholesale 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 Dollar Tree with a short position of Costco Wholesale. Check out your portfolio center. Please also check ongoing floating volatility patterns of Dollar Tree and Costco Wholesale.

Diversification Opportunities for Dollar Tree and Costco Wholesale

0.2

Correlation Coefficient

Dollar Tree  Costco Wholesale

Modest diversification

The 3 months correlation between Dollar and Costco is 0.2. Overlapping area represents the amount of risk that can be diversified away by holding Dollar Tree and Costco Wholesale Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Costco Wholesale Corp and Dollar Tree 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 Dollar Tree are associated (or correlated) with Costco Wholesale. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Costco Wholesale Corp has no effect on the direction of Dollar Tree i.e., Dollar Tree and Costco Wholesale go up and down completely randomly.

Pair Corralation between Dollar Tree and Costco Wholesale

Given the investment horizon of 90 days Dollar Tree is expected to under-perform the Costco Wholesale. In addition to that, Dollar Tree is 1.91 times more volatile than Costco Wholesale Corp. It trades about -0.05 of its total potential returns per unit of risk. Costco Wholesale Corp is currently generating about 0.14 per unit of volatility. If you would invest  44,235  in Costco Wholesale Corp on September 15, 2024 and sell it today you would earn a total of  54,700  from holding Costco Wholesale Corp or generate 123.66% return on investment over 90 days.

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

Dollar Tree  vs.  Costco Wholesale Corp

Dollar Tree

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Dollar Tree has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable basic indicators, Dollar Tree is not utilizing all of its potentials. The current stock price agitation, may contribute to short-term losses for the retail investors.

Costco Wholesale Corp

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Costco Wholesale Corp are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Costco Wholesale may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Dollar Tree and Costco Wholesale

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

The idea behind Dollar Tree and Costco Wholesale Corp 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.