Correlation Between Applied Industrial and Watsco

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

By analyzing existing cross correlation between Applied Industrial Technologies and Watsco Inc, you can compare the effects of market volatilities on Applied Industrial and Watsco 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 Applied Industrial with a short position of Watsco. Check out your portfolio center. Please also check ongoing floating volatility patterns of Applied Industrial and Watsco.

Diversification Opportunities for Applied Industrial and Watsco

0.78

Correlation Coefficient

Applied Industrial  Watsco

Poor diversification

The 3 months correlation between Applied and Watsco is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding Applied Industrial Technologie and Watsco Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Watsco Inc and Applied Industrial 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 Applied Industrial Technologies are associated (or correlated) with Watsco. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Watsco Inc has no effect on the direction of Applied Industrial i.e., Applied Industrial and Watsco go up and down completely randomly.

Pair Corralation between Applied Industrial and Watsco

Considering the 90-day investment horizon Applied Industrial Technologies is expected to generate 1.22 times more return on investment than Watsco. However, Applied Industrial is 1.22 times more volatile than Watsco Inc. It trades about 0.21 of its potential returns per unit of risk. Watsco Inc is currently generating about 0.1 per unit of risk. If you would invest  20,484  in Applied Industrial Technologies on August 30, 2024 and sell it today you would earn a total of  6,906  from holding Applied Industrial Technologies or generate 33.71% return on investment over 90 days.

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

Applied Industrial Technologie  vs.  Watsco Inc

Applied Industrial

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Applied Industrial Technologies are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unfluctuating forward indicators, Applied Industrial unveiled solid returns over the last few months and may actually be approaching a breakup point.

Watsco Inc

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Watsco Inc are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite somewhat unsteady basic indicators, Watsco may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with Applied Industrial and Watsco

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

The idea behind Applied Industrial Technologies and Watsco Inc 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 Sync Your Broker module to sync your existing holdings, watchlists, positions or portfolios from thousands of online brokerage services, banks, investment account aggregators and robo-advisors..