Correlation Between Advance Auto and British American

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

Diversification Opportunities for Advance Auto and British American

0.9

Correlation Coefficient

Advance Auto  British American

Almost no diversification

The 3 months correlation between Advance and British is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Advance Auto Parts and British American Tobacco in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on British American Tobacco 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 British American. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of British American Tobacco has no effect on the direction of Advance Auto i.e., Advance Auto and British American go up and down completely randomly.

Pair Corralation between Advance Auto and British American

Assuming the 90 days trading horizon Advance Auto Parts is expected to generate 2.59 times more return on investment than British American. However, Advance Auto is 2.59 times more volatile than British American Tobacco. It trades about 0.1 of its potential returns per unit of risk. British American Tobacco is currently generating about 0.17 per unit of risk. If you would invest  1,436  in Advance Auto Parts on September 19, 2024 and sell it today you would earn a total of  254.00  from holding Advance Auto Parts or generate 17.69% return on investment over 90 days.

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

Advance Auto Parts  vs.  British American Tobacco

Advance Auto Parts

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Advance Auto Parts are ranked lower than 7 (%) 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.

British American Tobacco

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in British American Tobacco are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, British American sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Advance Auto and British American

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

The idea behind Advance Auto Parts and British American Tobacco 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.