Correlation Between Nasdaq and Watsco

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

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

Diversification Opportunities for Nasdaq and Watsco

0.91

Correlation Coefficient

Nasdaq  Watsco

Almost no diversification

The 3 months correlation between Nasdaq and Watsco is 0.91. Overlapping area represents the amount of risk that can be diversified away by holding Nasdaq Inc and Watsco Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Watsco Inc and Nasdaq 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 Nasdaq Inc 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 Nasdaq i.e., Nasdaq and Watsco go up and down completely randomly.

Pair Corralation between Nasdaq and Watsco

Given the investment horizon of 90 days Nasdaq is expected to generate 1.15 times less return on investment than Watsco. But when comparing it to its historical volatility, Nasdaq Inc is 1.71 times less risky than Watsco. It trades about 0.12 of its potential returns per unit of risk. Watsco Inc is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  44,220  in Watsco Inc on September 26, 2024 and sell it today you would earn a total of  2,460  from holding Watsco Inc or generate 5.56% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	97.62%
Values	Daily Returns

Nasdaq Inc  vs.  Watsco Inc

Nasdaq Inc

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Nasdaq Inc are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Even with relatively unsteady basic indicators, Nasdaq may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Watsco Inc

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Watsco Inc are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Watsco is not utilizing all of its potentials. The newest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Nasdaq and Watsco

The main advantage of trading using opposite Nasdaq and Watsco positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Nasdaq 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 Nasdaq Inc 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 My Watchlist Analysis module to analyze my current watchlist and to refresh optimization strategy. Macroaxis watchlist is based on self-learning algorithm to remember stocks you like.