Correlation Between Methode Electronics and Luckin Coffee

Can any of the company-specific risk be diversified away by investing in both Methode Electronics and Luckin Coffee 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 Methode Electronics and Luckin Coffee into the same portfolio, which is an essential part of the fundamental portfolio management process.

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

Diversification Opportunities for Methode Electronics and Luckin Coffee

0.2

Correlation Coefficient

Methode Electronics  Luckin Coffee

Modest diversification

The 3 months correlation between Methode and Luckin is 0.2. Overlapping area represents the amount of risk that can be diversified away by holding Methode Electronics and Luckin Coffee in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Luckin Coffee and Methode Electronics 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 Methode Electronics are associated (or correlated) with Luckin Coffee. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Luckin Coffee has no effect on the direction of Methode Electronics i.e., Methode Electronics and Luckin Coffee go up and down completely randomly.

Pair Corralation between Methode Electronics and Luckin Coffee

Assuming the 90 days trading horizon Methode Electronics is expected to under-perform the Luckin Coffee. In addition to that, Methode Electronics is 1.06 times more volatile than Luckin Coffee. It trades about -0.02 of its total potential returns per unit of risk. Luckin Coffee is currently generating about 0.0 per unit of volatility. If you would invest  3,220  in Luckin Coffee on October 4, 2024 and sell it today you would lose (640.00) from holding Luckin Coffee or give up 19.88% of portfolio value over 90 days.

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

Methode Electronics  vs.  Luckin Coffee

Methode Electronics

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Methode Electronics are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Methode Electronics reported solid returns over the last few months and may actually be approaching a breakup point.

Luckin Coffee

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Luckin Coffee has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Luckin Coffee is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Methode Electronics and Luckin Coffee

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

The idea behind Methode Electronics and Luckin Coffee 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.