Correlation Between Summit Materials and Cheesecake Factory

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

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

Diversification Opportunities for Summit Materials and Cheesecake Factory

0.88

Correlation Coefficient

Summit Materials  Cheesecake Factory

Very poor diversification

The 3 months correlation between Summit and Cheesecake is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Summit Materials 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 Summit Materials 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 Summit Materials 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 Summit Materials i.e., Summit Materials and Cheesecake Factory go up and down completely randomly.

Pair Corralation between Summit Materials and Cheesecake Factory

Considering the 90-day investment horizon Summit Materials is expected to generate 2.08 times less return on investment than Cheesecake Factory. But when comparing it to its historical volatility, Summit Materials is 4.11 times less risky than Cheesecake Factory. It trades about 0.32 of its potential returns per unit of risk. The Cheesecake Factory is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  4,851  in The Cheesecake Factory on October 26, 2024 and sell it today you would earn a total of  292.00  from holding The Cheesecake Factory or generate 6.02% return on investment over 90 days.

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

Summit Materials  vs.  The Cheesecake Factory

Summit Materials

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Summit Materials are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, Summit Materials displayed solid returns over the last few months and may actually be approaching a breakup point.

The Cheesecake Factory

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in The Cheesecake Factory are ranked lower than 10 (%) 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 Summit Materials and Cheesecake Factory

The main advantage of trading using opposite Summit Materials and Cheesecake Factory positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Summit Materials 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 Summit Materials 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.

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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.