Correlation Between Estee Lauder and ELF Beauty

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

By analyzing existing cross correlation between Estee Lauder Companies and ELF Beauty, you can compare the effects of market volatilities on Estee Lauder and ELF Beauty 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 Estee Lauder with a short position of ELF Beauty. Check out your portfolio center. Please also check ongoing floating volatility patterns of Estee Lauder and ELF Beauty.

Diversification Opportunities for Estee Lauder and ELF Beauty

0.61

Correlation Coefficient

Estee Lauder  ELF Beauty

Poor diversification

The 3 months correlation between Estee and ELF is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding Estee Lauder Companies and ELF Beauty in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ELF Beauty and Estee Lauder 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 Estee Lauder Companies are associated (or correlated) with ELF Beauty. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ELF Beauty has no effect on the direction of Estee Lauder i.e., Estee Lauder and ELF Beauty go up and down completely randomly.

Pair Corralation between Estee Lauder and ELF Beauty

Allowing for the 90-day total investment horizon Estee Lauder Companies is expected to under-perform the ELF Beauty. But the stock apears to be less risky and, when comparing its historical volatility, Estee Lauder Companies is 1.23 times less risky than ELF Beauty. The stock trades about -0.02 of its potential returns per unit of risk. The ELF Beauty is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest  2,202  in ELF Beauty on January 31, 2024 and sell it today you would earn a total of  15,761  from holding ELF Beauty or generate 715.76% return on investment over 90 days.

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

Estee Lauder Companies  vs.  ELF Beauty

Estee Lauder Companies

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Estee Lauder Companies are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite quite weak essential indicators, Estee Lauder disclosed solid returns over the last few months and may actually be approaching a breakup point.

ELF Beauty

Risk-Adjusted Performance

5 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in ELF Beauty are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak essential indicators, ELF Beauty reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Estee Lauder and ELF Beauty

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

The idea behind Estee Lauder Companies and ELF Beauty 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.