Correlation Between RLJ Lodging and Shake Shack

Can any of the company-specific risk be diversified away by investing in both RLJ Lodging and Shake Shack 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 RLJ Lodging and Shake Shack into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between RLJ Lodging Trust and Shake Shack, you can compare the effects of market volatilities on RLJ Lodging and Shake Shack 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 RLJ Lodging with a short position of Shake Shack. Check out your portfolio center. Please also check ongoing floating volatility patterns of RLJ Lodging and Shake Shack.

Diversification Opportunities for RLJ Lodging and Shake Shack

0.74

Correlation Coefficient

RLJ Lodging  Shake Shack

Poor diversification

The 3 months correlation between RLJ and Shake is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding RLJ Lodging Trust and Shake Shack in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Shake Shack and RLJ Lodging 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 RLJ Lodging Trust are associated (or correlated) with Shake Shack. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Shake Shack has no effect on the direction of RLJ Lodging i.e., RLJ Lodging and Shake Shack go up and down completely randomly.

Pair Corralation between RLJ Lodging and Shake Shack

Considering the 90-day investment horizon RLJ Lodging Trust is expected to generate 0.48 times more return on investment than Shake Shack. However, RLJ Lodging Trust is 2.1 times less risky than Shake Shack. It trades about -0.09 of its potential returns per unit of risk. Shake Shack is currently generating about -0.09 per unit of risk. If you would invest  1,006  in RLJ Lodging Trust on November 29, 2024 and sell it today you would lose (88.00) from holding RLJ Lodging Trust or give up 8.75% of portfolio value over 90 days.

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

RLJ Lodging Trust  vs.  Shake Shack

RLJ Lodging Trust

Risk-Adjusted Performance

Very Weak

Over the last 90 days RLJ Lodging Trust has generated negative risk-adjusted returns adding no value to investors with long positions. Even with latest unfluctuating performance, the Stock's essential indicators remain steady and the new chaos on Wall Street may also be a sign of medium-term gains for the company stakeholders.

Shake Shack

Risk-Adjusted Performance

Very Weak

Over the last 90 days Shake Shack has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's basic indicators remain quite persistent which may send shares a bit higher in March 2025. The latest mess may also be a sign of long-standing up-swing for the company institutional investors.

Pair Trading with RLJ Lodging and Shake Shack

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

The idea behind RLJ Lodging Trust and Shake Shack 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 Equity Analysis module to research over 250,000 global equities including funds, stocks and ETFs to find investment opportunities.