Correlation Between BJs Restaurants and SP 500

Can any of the company-specific risk be diversified away by investing in both BJs Restaurants and SP 500 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 BJs Restaurants and SP 500 into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between BJs Restaurants and SP 500 MINI, you can compare the effects of market volatilities on BJs Restaurants and SP 500 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 BJs Restaurants with a short position of SP 500. Check out your portfolio center. Please also check ongoing floating volatility patterns of BJs Restaurants and SP 500.

Diversification Opportunities for BJs Restaurants and SP 500

0.72

Correlation Coefficient

BJs Restaurants  SP 500

Poor diversification

The 3 months correlation between BJs and XSP is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding BJs Restaurants and SP 500 MINI in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SP 500 MINI and BJs Restaurants 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 BJs Restaurants are associated (or correlated) with SP 500. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SP 500 MINI has no effect on the direction of BJs Restaurants i.e., BJs Restaurants and SP 500 go up and down completely randomly.

Pair Corralation between BJs Restaurants and SP 500

Given the investment horizon of 90 days BJs Restaurants is expected to under-perform the SP 500. In addition to that, BJs Restaurants is 3.35 times more volatile than SP 500 MINI. It trades about -0.02 of its total potential returns per unit of risk. SP 500 MINI is currently generating about -0.03 per unit of volatility. If you would invest  59,693  in SP 500 MINI on September 23, 2024 and sell it today you would lose (384.00) from holding SP 500 MINI or give up 0.64% of portfolio value over 90 days.

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

BJs Restaurants  vs.  SP 500 MINI

Pair Trading with BJs Restaurants and SP 500

The main advantage of trading using opposite BJs Restaurants and SP 500 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if BJs Restaurants position performs unexpectedly, SP 500 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 SP 500 will offset losses from the drop in SP 500's long position.

The idea behind BJs Restaurants and SP 500 MINI 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.