Correlation Between American Eagle and Gap

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

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

Diversification Opportunities for American Eagle and Gap

-0.62

Correlation Coefficient

American Eagle  Gap

Excellent diversification

The 3 months correlation between American and Gap is -0.62. Overlapping area represents the amount of risk that can be diversified away by holding American Eagle Outfitters and The Gap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Gap and American Eagle 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 American Eagle Outfitters 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 American Eagle i.e., American Eagle and Gap go up and down completely randomly.

Pair Corralation between American Eagle and Gap

Assuming the 90 days horizon American Eagle Outfitters is expected to generate 0.77 times more return on investment than Gap. However, American Eagle Outfitters is 1.29 times less risky than Gap. It trades about -0.09 of its potential returns per unit of risk. The Gap is currently generating about -0.21 per unit of risk. If you would invest  1,690  in American Eagle Outfitters on October 9, 2024 and sell it today you would lose (50.00) from holding American Eagle Outfitters or give up 2.96% of portfolio value over 90 days.

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

American Eagle Outfitters  vs.  The Gap

American Eagle Outfitters

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days American Eagle Outfitters has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Gap

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in The Gap are ranked lower than 8 (%) 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 American Eagle and Gap

The main advantage of trading using opposite American Eagle and Gap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if American Eagle 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 American Eagle Outfitters 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.