Correlation Between Costco Wholesale and Capital One

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

By analyzing existing cross correlation between Costco Wholesale and Capital One Financial, you can compare the effects of market volatilities on Costco Wholesale and Capital One 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 Costco Wholesale with a short position of Capital One. Check out your portfolio center. Please also check ongoing floating volatility patterns of Costco Wholesale and Capital One.

Diversification Opportunities for Costco Wholesale and Capital One

0.92

Correlation Coefficient

Costco Wholesale  Capital One

Almost no diversification

The 3 months correlation between Costco and Capital is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding Costco Wholesale and Capital One Financial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Capital One Financial and Costco Wholesale 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 Costco Wholesale are associated (or correlated) with Capital One. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Capital One Financial has no effect on the direction of Costco Wholesale i.e., Costco Wholesale and Capital One go up and down completely randomly.

Pair Corralation between Costco Wholesale and Capital One

Assuming the 90 days trading horizon Costco Wholesale is expected to generate 1.08 times less return on investment than Capital One. But when comparing it to its historical volatility, Costco Wholesale is 1.67 times less risky than Capital One. It trades about 0.13 of its potential returns per unit of risk. Capital One Financial is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  167,660  in Capital One Financial on September 26, 2024 and sell it today you would earn a total of  211,792  from holding Capital One Financial or generate 126.32% return on investment over 90 days.

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

Costco Wholesale  vs.  Capital One Financial

Costco Wholesale

Risk-Adjusted Performance

7 of 100

OK

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

Capital One Financial

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Capital One Financial are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak technical and fundamental indicators, Capital One showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Costco Wholesale and Capital One

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

The idea behind Costco Wholesale and Capital One Financial 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.