Correlation Between Sleep Number and Purple Innovation

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

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

Diversification Opportunities for Sleep Number and Purple Innovation

0.55

Correlation Coefficient

Sleep Number  Purple Innovation

Very weak diversification

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

Pair Corralation between Sleep Number and Purple Innovation

Given the investment horizon of 90 days Sleep Number Corp is expected to generate 1.72 times more return on investment than Purple Innovation. However, Sleep Number is 1.72 times more volatile than Purple Innovation. It trades about 0.07 of its potential returns per unit of risk. Purple Innovation is currently generating about -0.04 per unit of risk. If you would invest  1,423  in Sleep Number Corp on September 5, 2024 and sell it today you would earn a total of  222.00  from holding Sleep Number Corp or generate 15.6% return on investment over 90 days.

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

Sleep Number Corp  vs.  Purple Innovation

Sleep Number Corp

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Sleep Number Corp are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Even with relatively conflicting fundamental drivers, Sleep Number reported solid returns over the last few months and may actually be approaching a breakup point.

Purple Innovation

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Purple Innovation has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's basic indicators remain persistent and the latest mess on Wall Street may also be a sign of long-standing gains for the company institutional investors.

Pair Trading with Sleep Number and Purple Innovation

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

The idea behind Sleep Number Corp and Purple Innovation 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.