Can any of the company-specific risk be diversified away by investing in both Destination 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 Destination and Big 5 into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Destination XL Group and Big 5 Sporting, you can compare the effects of market volatilities on Destination 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 Destination with a short position of Big 5. Check out your portfolio center. Please also check ongoing floating volatility patterns of Destination and Big 5.
Diversification Opportunities for Destination and Big 5
The 3 months correlation between Destination and Big is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding Destination XL Group 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 Destination 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 Destination XL Group 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 Destination i.e., Destination and Big 5 go up and down completely randomly.
Given the investment horizon of 90 days Destination XL Group is expected to generate 0.75 times more return on investment than Big 5. However, Destination XL Group is 1.33 times less risky than Big 5. It trades about 0.06 of its potential returns per unit of risk. Big 5 Sporting is currently generating about 0.04 per unit of risk. If you would invest 343.00 in Destination XL Group on March 6, 2024 and sell it today you would earn a total of 18.00 from holding Destination XL Group or generate 5.25% return on investment over 90 days.
Over the last 90 days Destination XL Group has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable essential indicators, Destination is not utilizing all of its potentials. The recent stock price disturbance, may contribute to mid-run losses for the stockholders.
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 latest uncertain performance, the Stock's technical and fundamental indicators remain stable and the latest fuss on Wall Street may also be a sign of long-term gains for the venture sophisticated investors.