Correlation Between Advance Auto and Align Technology

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

By analyzing existing cross correlation between Advance Auto Parts and Align Technology, you can compare the effects of market volatilities on Advance Auto and Align Technology 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 Advance Auto with a short position of Align Technology. Check out your portfolio center. Please also check ongoing floating volatility patterns of Advance Auto and Align Technology.

Diversification Opportunities for Advance Auto and Align Technology

0.73

Correlation Coefficient

Advance Auto  Align Technology

Poor diversification

The 3 months correlation between Advance and Align is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding Advance Auto Parts and Align Technology in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Align Technology and Advance Auto 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 Advance Auto Parts are associated (or correlated) with Align Technology. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Align Technology has no effect on the direction of Advance Auto i.e., Advance Auto and Align Technology go up and down completely randomly.

Pair Corralation between Advance Auto and Align Technology

Assuming the 90 days trading horizon Advance Auto Parts is expected to generate 1.75 times more return on investment than Align Technology. However, Advance Auto is 1.75 times more volatile than Align Technology. It trades about 0.11 of its potential returns per unit of risk. Align Technology is currently generating about -0.01 per unit of risk. If you would invest  1,409  in Advance Auto Parts on September 27, 2024 and sell it today you would earn a total of  273.00  from holding Advance Auto Parts or generate 19.38% return on investment over 90 days.

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

Advance Auto Parts  vs.  Align Technology

Advance Auto Parts

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Advance Auto Parts are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Advance Auto sustained solid returns over the last few months and may actually be approaching a breakup point.

Align Technology

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Align Technology has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong essential indicators, Align Technology is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Advance Auto and Align Technology

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

The idea behind Advance Auto Parts and Align Technology 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.