Correlation Between Costco Wholesale and MP Materials

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

By analyzing existing cross correlation between Costco Wholesale and MP Materials Corp, you can compare the effects of market volatilities on Costco Wholesale and MP Materials 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 MP Materials. Check out your portfolio center. Please also check ongoing floating volatility patterns of Costco Wholesale and MP Materials.

Diversification Opportunities for Costco Wholesale and MP Materials

0.75

Correlation Coefficient

Costco Wholesale  MP Materials

Poor diversification

The 3 months correlation between Costco and M2PM34 is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Costco Wholesale and MP Materials Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MP Materials Corp 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 MP Materials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of MP Materials Corp has no effect on the direction of Costco Wholesale i.e., Costco Wholesale and MP Materials go up and down completely randomly.

Pair Corralation between Costco Wholesale and MP Materials

Assuming the 90 days trading horizon Costco Wholesale is expected to generate 0.43 times more return on investment than MP Materials. However, Costco Wholesale is 2.33 times less risky than MP Materials. It trades about 0.16 of its potential returns per unit of risk. MP Materials Corp is currently generating about -0.01 per unit of risk. If you would invest  12,713  in Costco Wholesale on October 7, 2024 and sell it today you would earn a total of  1,587  from holding Costco Wholesale or generate 12.48% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	97.37%
Values	Daily Returns

Costco Wholesale  vs.  MP Materials Corp

Costco Wholesale

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Costco Wholesale are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Costco Wholesale sustained solid returns over the last few months and may actually be approaching a breakup point.

MP Materials Corp

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in MP Materials Corp are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, MP Materials may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Costco Wholesale and MP Materials

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

The idea behind Costco Wholesale and MP Materials Corp 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 Insider Screener module to find insiders across different sectors to evaluate their impact on performance.