Correlation Between Travel Leisure and Royal Caribbean

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

By analyzing existing cross correlation between Travel Leisure Co and Royal Caribbean Cruises, you can compare the effects of market volatilities on Travel Leisure and Royal Caribbean 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 Travel Leisure with a short position of Royal Caribbean. Check out your portfolio center. Please also check ongoing floating volatility patterns of Travel Leisure and Royal Caribbean.

Diversification Opportunities for Travel Leisure and Royal Caribbean

0.8

Correlation Coefficient

Travel Leisure  Royal Caribbean

Very poor diversification

The 3 months correlation between Travel and Royal is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Travel Leisure Co and Royal Caribbean Cruises in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Royal Caribbean Cruises and Travel Leisure 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 Travel Leisure Co are associated (or correlated) with Royal Caribbean. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Royal Caribbean Cruises has no effect on the direction of Travel Leisure i.e., Travel Leisure and Royal Caribbean go up and down completely randomly.

Pair Corralation between Travel Leisure and Royal Caribbean

Considering the 90-day investment horizon Travel Leisure Co is expected to under-perform the Royal Caribbean. But the stock apears to be less risky and, when comparing its historical volatility, Travel Leisure Co is 1.55 times less risky than Royal Caribbean. The stock trades about -0.03 of its potential returns per unit of risk. The Royal Caribbean Cruises is currently generating about -0.01 of returns per unit of risk over similar time horizon. If you would invest  23,190  in Royal Caribbean Cruises on December 27, 2024 and sell it today you would lose (1,204) from holding Royal Caribbean Cruises or give up 5.19% of portfolio value over 90 days.

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

Travel Leisure Co  vs.  Royal Caribbean Cruises

Travel Leisure

Risk-Adjusted Performance

Very Weak

Over the last 90 days Travel Leisure Co has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent basic indicators, Travel Leisure is not utilizing all of its potentials. The current stock price mess, may contribute to short-term losses for the institutional investors.

Royal Caribbean Cruises

Risk-Adjusted Performance

Very Weak

Over the last 90 days Royal Caribbean Cruises has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent fundamental indicators, Royal Caribbean is not utilizing all of its potentials. The latest stock price mess, may contribute to short-term losses for the institutional investors.

Pair Trading with Travel Leisure and Royal Caribbean

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

The idea behind Travel Leisure Co and Royal Caribbean Cruises 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.