Correlation Between Sleep Number and MasterBrand

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

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

Diversification Opportunities for Sleep Number and MasterBrand

0.69

Correlation Coefficient

Sleep Number  MasterBrand

Poor diversification

The 3 months correlation between Sleep and MasterBrand is 0.69. Overlapping area represents the amount of risk that can be diversified away by holding Sleep Number Corp and MasterBrand in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MasterBrand and Sleep Number 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 Sleep Number Corp are associated (or correlated) with MasterBrand. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of MasterBrand has no effect on the direction of Sleep Number i.e., Sleep Number and MasterBrand go up and down completely randomly.

Pair Corralation between Sleep Number and MasterBrand

Given the investment horizon of 90 days Sleep Number Corp is expected to generate 2.21 times more return on investment than MasterBrand. However, Sleep Number is 2.21 times more volatile than MasterBrand. It trades about 0.01 of its potential returns per unit of risk. MasterBrand is currently generating about -0.17 per unit of risk. If you would invest  1,414  in Sleep Number Corp on February 4, 2024 and sell it today you would lose (8.00) from holding Sleep Number Corp or give up 0.57% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	95.65%
Values	Daily Returns

Sleep Number Corp  vs.  MasterBrand

Sleep Number Corp

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Sleep Number Corp are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Even with relatively uncertain fundamental drivers, Sleep Number reported solid returns over the last few months and may actually be approaching a breakup point.

MasterBrand

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in MasterBrand are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile fundamental drivers, MasterBrand exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Sleep Number and MasterBrand

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

The idea behind Sleep Number Corp and MasterBrand 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.