Correlation Between Watsco and Indutrade

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

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

Diversification Opportunities for Watsco and Indutrade

-0.7

Correlation Coefficient

Watsco  Indutrade

Excellent diversification

The 3 months correlation between Watsco and Indutrade is -0.7. Overlapping area represents the amount of risk that can be diversified away by holding Watsco Inc and Indutrade AB in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Indutrade AB and Watsco 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 Watsco Inc are associated (or correlated) with Indutrade. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Indutrade AB has no effect on the direction of Watsco i.e., Watsco and Indutrade go up and down completely randomly.

Pair Corralation between Watsco and Indutrade

Assuming the 90 days horizon Watsco Inc is expected to generate 1.33 times more return on investment than Indutrade. However, Watsco is 1.33 times more volatile than Indutrade AB. It trades about 0.05 of its potential returns per unit of risk. Indutrade AB is currently generating about -0.18 per unit of risk. If you would invest  44,462  in Watsco Inc on September 26, 2024 and sell it today you would earn a total of  2,218  from holding Watsco Inc or generate 4.99% return on investment over 90 days.

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

Watsco Inc  vs.  Indutrade AB

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.

Indutrade AB

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Indutrade AB has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with Watsco and Indutrade

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

The idea behind Watsco Inc and Indutrade AB 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.