Correlation Between Franchise and Tandy Leather

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

By analyzing existing cross correlation between Franchise Group and Tandy Leather Factory, you can compare the effects of market volatilities on Franchise and Tandy Leather 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 Franchise with a short position of Tandy Leather. Check out your portfolio center. Please also check ongoing floating volatility patterns of Franchise and Tandy Leather.

Diversification Opportunities for Franchise and Tandy Leather

0.55

Correlation Coefficient

Franchise  Tandy Leather

Very weak diversification

The 3 months correlation between Franchise and Tandy is 0.55. Overlapping area represents the amount of risk that can be diversified away by holding Franchise Group and Tandy Leather Factory in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tandy Leather Factory and Franchise 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 Franchise Group are associated (or correlated) with Tandy Leather. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tandy Leather Factory has no effect on the direction of Franchise i.e., Franchise and Tandy Leather go up and down completely randomly.

Pair Corralation between Franchise and Tandy Leather

Considering the 90-day investment horizon Franchise Group is expected to generate 1.16 times more return on investment than Tandy Leather. However, Franchise is 1.16 times more volatile than Tandy Leather Factory. It trades about 0.06 of its potential returns per unit of risk. Tandy Leather Factory is currently generating about 0.02 per unit of risk. If you would invest  2,494  in Franchise Group on September 24, 2024 and sell it today you would earn a total of  476.00  from holding Franchise Group or generate 19.09% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	28.17%
Values	Daily Returns

Franchise Group  vs.  Tandy Leather Factory

Franchise Group

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Franchise Group has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Franchise is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Tandy Leather Factory

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Tandy Leather Factory are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly unfluctuating essential indicators, Tandy Leather reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Franchise and Tandy Leather

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

The idea behind Franchise Group and Tandy Leather Factory 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 Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.