Correlation Between Advance Auto and Bath Body

Can any of the company-specific risk be diversified away by investing in both Advance Auto and Bath Body 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 Bath Body 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 Bath Body Works, you can compare the effects of market volatilities on Advance Auto and Bath Body 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 Bath Body. Check out your portfolio center. Please also check ongoing floating volatility patterns of Advance Auto and Bath Body.

Diversification Opportunities for Advance Auto and Bath Body

0.86

Correlation Coefficient

Advance Auto  Bath Body

Very poor diversification

The 3 months correlation between Advance and Bath is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Advance Auto Parts and Bath Body Works in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Bath Body Works 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 Bath Body. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Bath Body Works has no effect on the direction of Advance Auto i.e., Advance Auto and Bath Body go up and down completely randomly.

Pair Corralation between Advance Auto and Bath Body

Assuming the 90 days trading horizon Advance Auto is expected to generate 2.15 times less return on investment than Bath Body. In addition to that, Advance Auto is 1.08 times more volatile than Bath Body Works. It trades about 0.1 of its total potential returns per unit of risk. Bath Body Works is currently generating about 0.24 per unit of volatility. If you would invest  3,968  in Bath Body Works on September 18, 2024 and sell it today you would earn a total of  1,931  from holding Bath Body Works or generate 48.66% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.41%
Values	Daily Returns

Advance Auto Parts  vs.  Bath Body Works

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.

Bath Body Works

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Bath Body Works are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. Despite somewhat uncertain fundamental drivers, Bath Body sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Advance Auto and Bath Body

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

The idea behind Advance Auto Parts and Bath Body Works 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.