Correlation Between Fastenal and Watsco

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

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

Diversification Opportunities for Fastenal and Watsco

0.83

Correlation Coefficient

Fastenal  Watsco

Very poor diversification

The 3 months correlation between Fastenal and Watsco is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Fastenal Company and Watsco Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Watsco Inc and Fastenal 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 Fastenal Company 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 Fastenal i.e., Fastenal and Watsco go up and down completely randomly.

Pair Corralation between Fastenal and Watsco

Given the investment horizon of 90 days Fastenal is expected to generate 2.27 times less return on investment than Watsco. But when comparing it to its historical volatility, Fastenal Company is 1.18 times less risky than Watsco. It trades about 0.2 of its potential returns per unit of risk. Watsco Inc is currently generating about 0.38 of returns per unit of risk over similar time horizon. If you would invest  47,400  in Watsco Inc on September 2, 2024 and sell it today you would earn a total of  7,760  from holding Watsco Inc or generate 16.37% return on investment over 90 days.

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

Fastenal Company  vs.  Watsco Inc

Fastenal

Risk-Adjusted Performance

16 of 100

Solid

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

Watsco Inc

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Watsco Inc are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of very uncertain basic indicators, Watsco displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Fastenal and Watsco

The main advantage of trading using opposite Fastenal and Watsco positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Fastenal 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 Fastenal Company 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 Portfolio Anywhere module to track or share privately all of your investments from the convenience of any device.