Correlation Between Destination and Advance Auto

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

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

Diversification Opportunities for Destination and Advance Auto

-0.34

Correlation Coefficient

Destination  Advance Auto

Very good diversification

The 3 months correlation between Destination and Advance is -0.34. Overlapping area represents the amount of risk that can be diversified away by holding Destination XL Group and Advance Auto Parts in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Advance Auto Parts and Destination 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 Destination XL Group are associated (or correlated) with Advance Auto. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Advance Auto Parts has no effect on the direction of Destination i.e., Destination and Advance Auto go up and down completely randomly.

Pair Corralation between Destination and Advance Auto

Given the investment horizon of 90 days Destination is expected to generate 10.78 times less return on investment than Advance Auto. But when comparing it to its historical volatility, Destination XL Group is 1.01 times less risky than Advance Auto. It trades about 0.01 of its potential returns per unit of risk. Advance Auto Parts is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  3,922  in Advance Auto Parts on September 12, 2024 and sell it today you would earn a total of  784.00  from holding Advance Auto Parts or generate 19.99% return on investment over 90 days.

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

Destination XL Group  vs.  Advance Auto Parts

Destination XL Group

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Destination XL Group has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable essential indicators, Destination is not utilizing all of its potentials. The recent stock price disturbance, may contribute to mid-run losses for the stockholders.

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. Even with relatively unfluctuating basic indicators, Advance Auto reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Destination and Advance Auto

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

The idea behind Destination XL Group and Advance Auto Parts 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..