Correlation Between Tofu Restaurant and Louisa Professional

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

By analyzing existing cross correlation between Tofu Restaurant Co and Louisa Professional Coffee, you can compare the effects of market volatilities on Tofu Restaurant and Louisa Professional 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 Tofu Restaurant with a short position of Louisa Professional. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tofu Restaurant and Louisa Professional.

Diversification Opportunities for Tofu Restaurant and Louisa Professional

0.2

Correlation Coefficient

Tofu Restaurant  Louisa Professional

Modest diversification

The 3 months correlation between Tofu and Louisa is 0.2. Overlapping area represents the amount of risk that can be diversified away by holding Tofu Restaurant Co and Louisa Professional Coffee in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Louisa Professional and Tofu Restaurant 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 Tofu Restaurant Co are associated (or correlated) with Louisa Professional. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Louisa Professional has no effect on the direction of Tofu Restaurant i.e., Tofu Restaurant and Louisa Professional go up and down completely randomly.

Pair Corralation between Tofu Restaurant and Louisa Professional

Assuming the 90 days trading horizon Tofu Restaurant Co is expected to under-perform the Louisa Professional. But the stock apears to be less risky and, when comparing its historical volatility, Tofu Restaurant Co is 1.32 times less risky than Louisa Professional. The stock trades about -0.02 of its potential returns per unit of risk. The Louisa Professional Coffee is currently generating about 0.25 of returns per unit of risk over similar time horizon. If you would invest  8,746  in Louisa Professional Coffee on December 30, 2024 and sell it today you would earn a total of  2,554  from holding Louisa Professional Coffee or generate 29.2% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.25%
Values	Daily Returns

Tofu Restaurant Co  vs.  Louisa Professional Coffee

Tofu Restaurant

Risk-Adjusted Performance

Very Weak

Over the last 90 days Tofu Restaurant Co has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Tofu Restaurant is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Louisa Professional

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Louisa Professional Coffee are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, Louisa Professional showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Tofu Restaurant and Louisa Professional

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

The idea behind Tofu Restaurant Co and Louisa Professional Coffee 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.