Correlation Between American Eagle and Digital Brands

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

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

Diversification Opportunities for American Eagle and Digital Brands

0.65

Correlation Coefficient

American Eagle  Digital Brands

Poor diversification

The 3 months correlation between American and Digital is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding American Eagle Outfitters and Digital Brands Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Digital Brands Group and American Eagle 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 American Eagle Outfitters are associated (or correlated) with Digital Brands. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Digital Brands Group has no effect on the direction of American Eagle i.e., American Eagle and Digital Brands go up and down completely randomly.

Pair Corralation between American Eagle and Digital Brands

Considering the 90-day investment horizon American Eagle Outfitters is expected to generate 0.29 times more return on investment than Digital Brands. However, American Eagle Outfitters is 3.39 times less risky than Digital Brands. It trades about -0.12 of its potential returns per unit of risk. Digital Brands Group is currently generating about -0.42 per unit of risk. If you would invest  1,868  in American Eagle Outfitters on September 25, 2024 and sell it today you would lose (199.00) from holding American Eagle Outfitters or give up 10.65% of portfolio value over 90 days.

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

American Eagle Outfitters  vs.  Digital Brands Group

American Eagle Outfitters

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days American Eagle Outfitters has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unfluctuating performance in the last few months, the Stock's technical and fundamental indicators remain very healthy which may send shares a bit higher in January 2025. The recent disarray may also be a sign of long period up-swing for the firm investors.

Digital Brands Group

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Digital Brands Group has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's technical and fundamental indicators remain fairly strong which may send shares a bit higher in January 2025. The recent confusion may also be a sign of long-lasting up-swing for the firm traders.

Pair Trading with American Eagle and Digital Brands

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

The idea behind American Eagle Outfitters and Digital Brands Group 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.