Correlation Between Western Digital and Shake Shack

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

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

Diversification Opportunities for Western Digital and Shake Shack

0.09

Correlation Coefficient

Western Digital  Shake Shack

Significant diversification

The 3 months correlation between Western and Shake is 0.09. Overlapping area represents the amount of risk that can be diversified away by holding Western Digital and Shake Shack in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Shake Shack and Western Digital 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 Western Digital are associated (or correlated) with Shake Shack. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Shake Shack has no effect on the direction of Western Digital i.e., Western Digital and Shake Shack go up and down completely randomly.

Pair Corralation between Western Digital and Shake Shack

Considering the 90-day investment horizon Western Digital is expected to under-perform the Shake Shack. In addition to that, Western Digital is 1.44 times more volatile than Shake Shack. It trades about -0.15 of its total potential returns per unit of risk. Shake Shack is currently generating about -0.03 per unit of volatility. If you would invest  13,365  in Shake Shack on October 10, 2024 and sell it today you would lose (162.00) from holding Shake Shack or give up 1.21% of portfolio value over 90 days.

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

Western Digital  vs.  Shake Shack

Western Digital

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Western Digital are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound fundamental indicators, Western Digital is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Shake Shack

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Shake Shack are ranked lower than 11 (%) 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.

Pair Trading with Western Digital and Shake Shack

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

The idea behind Western Digital and Shake Shack 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.