Correlation Between Shake Shack and Old Dominion

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

By analyzing existing cross correlation between Shake Shack and Old Dominion Freight, you can compare the effects of market volatilities on Shake Shack and Old Dominion 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 Old Dominion. Check out your portfolio center. Please also check ongoing floating volatility patterns of Shake Shack and Old Dominion.

Diversification Opportunities for Shake Shack and Old Dominion

0.73

Correlation Coefficient

Shake Shack  Old Dominion

Poor diversification

The 3 months correlation between Shake and Old is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding Shake Shack and Old Dominion Freight in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Old Dominion Freight 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 Old Dominion. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Old Dominion Freight has no effect on the direction of Shake Shack i.e., Shake Shack and Old Dominion go up and down completely randomly.

Pair Corralation between Shake Shack and Old Dominion

Given the investment horizon of 90 days Shake Shack is expected to generate 0.96 times more return on investment than Old Dominion. However, Shake Shack is 1.04 times less risky than Old Dominion. It trades about 0.18 of its potential returns per unit of risk. Old Dominion Freight is currently generating about 0.03 per unit of risk. If you would invest  10,249  in Shake Shack on September 17, 2024 and sell it today you would earn a total of  2,910  from holding Shake Shack or generate 28.39% return on investment over 90 days.

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

Shake Shack  vs.  Old Dominion Freight

Shake Shack

Risk-Adjusted Performance

14 of 100

Good

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

Old Dominion Freight

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Old Dominion Freight are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite quite persistent technical and fundamental indicators, Old Dominion is not utilizing all of its potentials. The current stock price mess, may contribute to short-term losses for the institutional investors.

Pair Trading with Shake Shack and Old Dominion

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

The idea behind Shake Shack and Old Dominion Freight 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.