Can any of the company-specific risk be diversified away by investing in both Macys and Dicks Sporting 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 Macys and Dicks Sporting into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Macys Inc and Dicks Sporting Goods, you can compare the effects of market volatilities on Macys and Dicks Sporting 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 Macys with a short position of Dicks Sporting. Check out your portfolio center. Please also check ongoing floating volatility patterns of Macys and Dicks Sporting.
Diversification Opportunities for Macys and Dicks Sporting
The 3 months correlation between Macys and Dicks is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding Macys Inc and Dicks Sporting Goods in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dicks Sporting Goods and Macys 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 Macys Inc are associated (or correlated) with Dicks Sporting. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dicks Sporting Goods has no effect on the direction of Macys i.e., Macys and Dicks Sporting go up and down completely randomly.
Taking into account the 90-day investment horizon Macys Inc is expected to generate 1.81 times more return on investment than Dicks Sporting. However, Macys is 1.81 times more volatile than Dicks Sporting Goods. It trades about 0.57 of its potential returns per unit of risk. Dicks Sporting Goods is currently generating about 0.47 per unit of risk. If you would invest 1,109 in Macys Inc on September 10, 2023 and sell it today you would earn a total of 630.00 from holding Macys Inc or generate 56.81% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in Macys Inc are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of very abnormal primary indicators, Macys displayed solid returns over the last few months and may actually be approaching a breakup point.
Compared to the overall equity markets, risk-adjusted returns on investments in Dicks Sporting Goods are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unfluctuating forward-looking signals, Dicks Sporting unveiled solid returns over the last few months and may actually be approaching a breakup point.
The main advantage of trading using opposite Macys and Dicks Sporting positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Macys position performs unexpectedly, Dicks Sporting 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 Dicks Sporting will offset losses from the drop in Dicks Sporting's long position.
The idea behind Macys Inc and Dicks Sporting Goods 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..
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