Correlation Between El Pollo and First Watch

Can any of the company-specific risk be diversified away by investing in both El Pollo and First Watch 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 El Pollo and First Watch into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between El Pollo Loco and First Watch Restaurant, you can compare the effects of market volatilities on El Pollo and First Watch 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 El Pollo with a short position of First Watch. Check out your portfolio center. Please also check ongoing floating volatility patterns of El Pollo and First Watch.

Diversification Opportunities for El Pollo and First Watch

0.78

Correlation Coefficient

El Pollo  First Watch

Poor diversification

The 3 months correlation between LOCO and First is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding El Pollo Loco and First Watch Restaurant in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Watch Restaurant and El Pollo 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 El Pollo Loco are associated (or correlated) with First Watch. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First Watch Restaurant has no effect on the direction of El Pollo i.e., El Pollo and First Watch go up and down completely randomly.

Pair Corralation between El Pollo and First Watch

Given the investment horizon of 90 days El Pollo Loco is expected to under-perform the First Watch. But the stock apears to be less risky and, when comparing its historical volatility, El Pollo Loco is 1.73 times less risky than First Watch. The stock trades about -0.08 of its potential returns per unit of risk. The First Watch Restaurant is currently generating about -0.01 of returns per unit of risk over similar time horizon. If you would invest  1,853  in First Watch Restaurant on December 28, 2024 and sell it today you would lose (96.00) from holding First Watch Restaurant or give up 5.18% of portfolio value over 90 days.

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

El Pollo Loco  vs.  First Watch Restaurant

El Pollo Loco

Risk-Adjusted Performance

Very Weak

Over the last 90 days El Pollo Loco has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's fundamental indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

First Watch Restaurant

Risk-Adjusted Performance

Very Weak

Over the last 90 days First Watch Restaurant has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, First Watch is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with El Pollo and First Watch

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

The idea behind El Pollo Loco and First Watch Restaurant 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.