Correlation Between City Lodge and RCL Foods

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

By analyzing existing cross correlation between City Lodge Hotels and RCL Foods, you can compare the effects of market volatilities on City Lodge and RCL Foods 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 City Lodge with a short position of RCL Foods. Check out your portfolio center. Please also check ongoing floating volatility patterns of City Lodge and RCL Foods.

Diversification Opportunities for City Lodge and RCL Foods

0.31

Correlation Coefficient

City Lodge  RCL Foods

Weak diversification

The 3 months correlation between City and RCL is 0.31. Overlapping area represents the amount of risk that can be diversified away by holding City Lodge Hotels and RCL Foods in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on RCL Foods and City Lodge 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 City Lodge Hotels are associated (or correlated) with RCL Foods. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of RCL Foods has no effect on the direction of City Lodge i.e., City Lodge and RCL Foods go up and down completely randomly.

Pair Corralation between City Lodge and RCL Foods

Assuming the 90 days trading horizon City Lodge Hotels is expected to under-perform the RCL Foods. But the stock apears to be less risky and, when comparing its historical volatility, City Lodge Hotels is 1.85 times less risky than RCL Foods. The stock trades about -0.55 of its potential returns per unit of risk. The RCL Foods is currently generating about -0.05 of returns per unit of risk over similar time horizon. If you would invest  98,300  in RCL Foods on October 13, 2024 and sell it today you would lose (2,100) from holding RCL Foods or give up 2.14% of portfolio value over 90 days.

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

City Lodge Hotels  vs.  RCL Foods

City Lodge Hotels

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days City Lodge Hotels has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unsteady performance, the Stock's technical and fundamental indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

RCL Foods

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in RCL Foods are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady technical and fundamental indicators, RCL Foods may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with City Lodge and RCL Foods

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

The idea behind City Lodge Hotels and RCL Foods 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 Headlines Timeline module to stay connected to all market stories and filter out noise. Drill down to analyze hype elasticity.