Correlation Between Basic Materials and Advance Auto

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

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

Diversification Opportunities for Basic Materials and Advance Auto

0.5

Correlation Coefficient

Basic Materials  Advance Auto

Very weak diversification

The 3 months correlation between Basic and Advance is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials 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 Basic Materials 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 Basic Materials 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 Basic Materials i.e., Basic Materials and Advance Auto go up and down completely randomly.

Pair Corralation between Basic Materials and Advance Auto

Assuming the 90 days trading horizon Basic Materials is expected to generate 5.88 times less return on investment than Advance Auto. But when comparing it to its historical volatility, Basic Materials is 3.3 times less risky than Advance Auto. It trades about 0.12 of its potential returns per unit of risk. Advance Auto Parts is currently generating about 0.22 of returns per unit of risk over similar time horizon. If you would invest  1,440  in Advance Auto Parts on September 19, 2024 and sell it today you would earn a total of  250.00  from holding Advance Auto Parts or generate 17.36% return on investment over 90 days.

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

Basic Materials  vs.  Advance Auto Parts

Pair Trading with Basic Materials and Advance Auto

The main advantage of trading using opposite Basic Materials and Advance Auto positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Basic Materials 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 Basic Materials 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.