Correlation Between Deckers Outdoor and American Cannabis

Can any of the company-specific risk be diversified away by investing in both Deckers Outdoor and American Cannabis 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 Deckers Outdoor and American Cannabis into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Deckers Outdoor and American Cannabis, you can compare the effects of market volatilities on Deckers Outdoor and American Cannabis 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 Deckers Outdoor with a short position of American Cannabis. Check out your portfolio center. Please also check ongoing floating volatility patterns of Deckers Outdoor and American Cannabis.

Diversification Opportunities for Deckers Outdoor and American Cannabis

-0.59

Correlation Coefficient

Deckers Outdoor  American Cannabis

Excellent diversification

The 3 months correlation between Deckers and American is -0.59. Overlapping area represents the amount of risk that can be diversified away by holding Deckers Outdoor and American Cannabis in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Cannabis and Deckers Outdoor 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 Deckers Outdoor are associated (or correlated) with American Cannabis. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Cannabis has no effect on the direction of Deckers Outdoor i.e., Deckers Outdoor and American Cannabis go up and down completely randomly.

Pair Corralation between Deckers Outdoor and American Cannabis

Given the investment horizon of 90 days Deckers Outdoor is expected to generate 17.37 times less return on investment than American Cannabis. But when comparing it to its historical volatility, Deckers Outdoor is 25.18 times less risky than American Cannabis. It trades about 0.2 of its potential returns per unit of risk. American Cannabis is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  0.50  in American Cannabis on September 4, 2024 and sell it today you would lose (0.47) from holding American Cannabis or give up 94.0% of portfolio value over 90 days.

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

Deckers Outdoor  vs.  American Cannabis

Deckers Outdoor

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Deckers Outdoor are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Despite quite unfluctuating fundamental indicators, Deckers Outdoor disclosed solid returns over the last few months and may actually be approaching a breakup point.

American Cannabis

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in American Cannabis are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Even with relatively inconsistent primary indicators, American Cannabis revealed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Deckers Outdoor and American Cannabis

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

The idea behind Deckers Outdoor and American Cannabis 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.