Correlation Between Prudential Financial and Costco Wholesale

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

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

Diversification Opportunities for Prudential Financial and Costco Wholesale

0.88

Correlation Coefficient

Prudential Financial  Costco Wholesale

Very poor diversification

The 3 months correlation between Prudential and Costco is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Prudential Financial and Costco Wholesale in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Costco Wholesale and Prudential Financial 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 Prudential Financial are associated (or correlated) with Costco Wholesale. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Costco Wholesale has no effect on the direction of Prudential Financial i.e., Prudential Financial and Costco Wholesale go up and down completely randomly.

Pair Corralation between Prudential Financial and Costco Wholesale

Assuming the 90 days trading horizon Prudential Financial is expected to generate 12.51 times less return on investment than Costco Wholesale. But when comparing it to its historical volatility, Prudential Financial is 8.76 times less risky than Costco Wholesale. It trades about 0.13 of its potential returns per unit of risk. Costco Wholesale is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  1,727,710  in Costco Wholesale on September 18, 2024 and sell it today you would earn a total of  297,440  from holding Costco Wholesale or generate 17.22% return on investment over 90 days.

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

Prudential Financial  vs.  Costco Wholesale

Prudential Financial

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Prudential Financial are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong basic indicators, Prudential Financial is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Costco Wholesale

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Costco Wholesale are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Costco Wholesale showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Prudential Financial and Costco Wholesale

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

The idea behind Prudential Financial and Costco Wholesale 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.

Check out your portfolio center.

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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.