Correlation Between Big 5 and Chesapeake Utilities

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

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

Diversification Opportunities for Big 5 and Chesapeake Utilities

-0.57

Correlation Coefficient

Big 5  Chesapeake Utilities

Excellent diversification

The 3 months correlation between Big and Chesapeake is -0.57. Overlapping area represents the amount of risk that can be diversified away by holding Big 5 Sporting and Chesapeake Utilities in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Chesapeake Utilities and Big 5 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 Big 5 Sporting are associated (or correlated) with Chesapeake Utilities. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Chesapeake Utilities has no effect on the direction of Big 5 i.e., Big 5 and Chesapeake Utilities go up and down completely randomly.

Pair Corralation between Big 5 and Chesapeake Utilities

Assuming the 90 days horizon Big 5 Sporting is expected to under-perform the Chesapeake Utilities. In addition to that, Big 5 is 2.8 times more volatile than Chesapeake Utilities. It trades about -0.03 of its total potential returns per unit of risk. Chesapeake Utilities is currently generating about 0.11 per unit of volatility. If you would invest  11,000  in Chesapeake Utilities on September 14, 2024 and sell it today you would earn a total of  1,100  from holding Chesapeake Utilities or generate 10.0% return on investment over 90 days.

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

Big 5 Sporting  vs.  Chesapeake Utilities

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. Despite latest fragile performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Chesapeake Utilities

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Chesapeake Utilities are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Chesapeake Utilities may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Big 5 and Chesapeake Utilities

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

The idea behind Big 5 Sporting and Chesapeake Utilities 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.