Correlation Between Lululemon Athletica and Gap

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

By analyzing existing cross correlation between Lululemon Athletica and The Gap, you can compare the effects of market volatilities on Lululemon Athletica and Gap 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 Lululemon Athletica with a short position of Gap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Lululemon Athletica and Gap.

Diversification Opportunities for Lululemon Athletica and Gap

0.73

Correlation Coefficient

Lululemon Athletica  Gap

Poor diversification

The 3 months correlation between Lululemon and Gap is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding Lululemon Athletica and The Gap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Gap and Lululemon Athletica 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 Lululemon Athletica are associated (or correlated) with Gap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Gap has no effect on the direction of Lululemon Athletica i.e., Lululemon Athletica and Gap go up and down completely randomly.

Pair Corralation between Lululemon Athletica and Gap

Assuming the 90 days horizon Lululemon Athletica is expected to generate 0.76 times more return on investment than Gap. However, Lululemon Athletica is 1.31 times less risky than Gap. It trades about 0.16 of its potential returns per unit of risk. The Gap is currently generating about 0.07 per unit of risk. If you would invest  27,415  in Lululemon Athletica on October 24, 2024 and sell it today you would earn a total of  8,510  from holding Lululemon Athletica or generate 31.04% return on investment over 90 days.

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

Lululemon Athletica  vs.  The Gap

Lululemon Athletica

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Lululemon Athletica are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Lululemon Athletica reported solid returns over the last few months and may actually be approaching a breakup point.

Gap

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in The Gap are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Gap reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Lululemon Athletica and Gap

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

The idea behind Lululemon Athletica and The Gap 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 Portfolio Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.