Correlation Between Verizon Communications and Advance Auto

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

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

Diversification Opportunities for Verizon Communications and Advance Auto

0.74

Correlation Coefficient

Verizon Communications  Advance Auto

Poor diversification

The 3 months correlation between Verizon and Advance is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding Verizon Communications 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 Verizon Communications 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 Verizon Communications 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 Verizon Communications i.e., Verizon Communications and Advance Auto go up and down completely randomly.

Pair Corralation between Verizon Communications and Advance Auto

Assuming the 90 days trading horizon Verizon Communications is expected to generate 2.94 times less return on investment than Advance Auto. But when comparing it to its historical volatility, Verizon Communications is 2.07 times less risky than Advance Auto. It trades about 0.07 of its potential returns per unit of risk. Advance Auto Parts is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  1,436  in Advance Auto Parts on September 19, 2024 and sell it today you would earn a total of  254.00  from holding Advance Auto Parts or generate 17.69% return on investment over 90 days.

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

Verizon Communications  vs.  Advance Auto Parts

Verizon Communications

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Verizon Communications are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Verizon Communications may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Advance Auto Parts

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Advance Auto Parts are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Advance Auto sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Verizon Communications and Advance Auto

The main advantage of trading using opposite Verizon Communications and Advance Auto positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Verizon Communications 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 Verizon Communications 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 Equity Analysis module to research over 250,000 global equities including funds, stocks and ETFs to find investment opportunities.