Correlation Between Stepan and Cheesecake Factory

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

By analyzing existing cross correlation between Stepan Company and The Cheesecake Factory, you can compare the effects of market volatilities on Stepan and Cheesecake Factory 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 Stepan with a short position of Cheesecake Factory. Check out your portfolio center. Please also check ongoing floating volatility patterns of Stepan and Cheesecake Factory.

Diversification Opportunities for Stepan and Cheesecake Factory

-0.08

Correlation Coefficient

Stepan  Cheesecake Factory

Good diversification

The 3 months correlation between Stepan and Cheesecake is -0.08. Overlapping area represents the amount of risk that can be diversified away by holding Stepan Company and The Cheesecake Factory in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on The Cheesecake Factory and Stepan 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 Stepan Company are associated (or correlated) with Cheesecake Factory. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of The Cheesecake Factory has no effect on the direction of Stepan i.e., Stepan and Cheesecake Factory go up and down completely randomly.

Pair Corralation between Stepan and Cheesecake Factory

Considering the 90-day investment horizon Stepan Company is expected to under-perform the Cheesecake Factory. But the stock apears to be less risky and, when comparing its historical volatility, Stepan Company is 1.19 times less risky than Cheesecake Factory. The stock trades about -0.04 of its potential returns per unit of risk. The The Cheesecake Factory is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  3,198  in The Cheesecake Factory on September 26, 2024 and sell it today you would earn a total of  1,609  from holding The Cheesecake Factory or generate 50.31% return on investment over 90 days.

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

Stepan Company  vs.  The Cheesecake Factory

Stepan Company

Risk-Adjusted Performance

0 of 100

Very Weak

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

The Cheesecake Factory

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in The Cheesecake Factory are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of rather unfluctuating forward-looking signals, Cheesecake Factory exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Stepan and Cheesecake Factory

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

The idea behind Stepan Company and The Cheesecake Factory 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.