Correlation Between Shake Shack and Arcos Dorados

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

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

Diversification Opportunities for Shake Shack and Arcos Dorados

-0.43

Correlation Coefficient

Shake Shack  Arcos Dorados

Very good diversification

The 3 months correlation between Shake and Arcos is -0.43. Overlapping area represents the amount of risk that can be diversified away by holding Shake Shack and Arcos Dorados Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Arcos Dorados Holdings and Shake Shack 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 Shake Shack are associated (or correlated) with Arcos Dorados. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Arcos Dorados Holdings has no effect on the direction of Shake Shack i.e., Shake Shack and Arcos Dorados go up and down completely randomly.

Pair Corralation between Shake Shack and Arcos Dorados

Given the investment horizon of 90 days Shake Shack is expected to generate 0.81 times more return on investment than Arcos Dorados. However, Shake Shack is 1.23 times less risky than Arcos Dorados. It trades about 0.21 of its potential returns per unit of risk. Arcos Dorados Holdings is currently generating about 0.0 per unit of risk. If you would invest  10,180  in Shake Shack on September 12, 2024 and sell it today you would earn a total of  3,148  from holding Shake Shack or generate 30.92% return on investment over 90 days.

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

Shake Shack  vs.  Arcos Dorados Holdings

Shake Shack

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Shake Shack are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Despite quite unfluctuating basic indicators, Shake Shack disclosed solid returns over the last few months and may actually be approaching a breakup point.

Arcos Dorados Holdings

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Arcos Dorados Holdings has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy fundamental indicators, Arcos Dorados is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Shake Shack and Arcos Dorados

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

The idea behind Shake Shack and Arcos Dorados Holdings 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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.