Correlation Between Central Garden and Nestle SA

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

By analyzing existing cross correlation between Central Garden Pet and Nestle SA, you can compare the effects of market volatilities on Central Garden and Nestle SA 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 Central Garden with a short position of Nestle SA. Check out your portfolio center. Please also check ongoing floating volatility patterns of Central Garden and Nestle SA.

Diversification Opportunities for Central Garden and Nestle SA

-0.68

Correlation Coefficient

Central Garden  Nestle SA

Excellent diversification

The 3 months correlation between Central and Nestle is -0.68. Overlapping area represents the amount of risk that can be diversified away by holding Central Garden Pet and Nestle SA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Nestle SA and Central Garden 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 Central Garden Pet are associated (or correlated) with Nestle SA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Nestle SA has no effect on the direction of Central Garden i.e., Central Garden and Nestle SA go up and down completely randomly.

Pair Corralation between Central Garden and Nestle SA

Assuming the 90 days horizon Central Garden Pet is expected to generate 1.71 times more return on investment than Nestle SA. However, Central Garden is 1.71 times more volatile than Nestle SA. It trades about 0.33 of its potential returns per unit of risk. Nestle SA is currently generating about -0.42 per unit of risk. If you would invest  2,906  in Central Garden Pet on September 19, 2024 and sell it today you would earn a total of  742.50  from holding Central Garden Pet or generate 25.55% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	97.62%
Values	Daily Returns

Central Garden Pet  vs.  Nestle SA

Central Garden Pet

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Central Garden Pet are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Central Garden may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Nestle SA

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Central Garden and Nestle SA

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

The idea behind Central Garden Pet and Nestle SA 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.