Correlation Between Tractor Supply and Advance Auto

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

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

Diversification Opportunities for Tractor Supply and Advance Auto

0.72

Correlation Coefficient

Tractor Supply  Advance Auto

Poor diversification

The 3 months correlation between Tractor and Advance is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Tractor Supply 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 Tractor Supply 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 Tractor Supply 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 Tractor Supply i.e., Tractor Supply and Advance Auto go up and down completely randomly.

Pair Corralation between Tractor Supply and Advance Auto

Given the investment horizon of 90 days Tractor Supply is expected to generate 0.57 times more return on investment than Advance Auto. However, Tractor Supply is 1.76 times less risky than Advance Auto. It trades about 0.17 of its potential returns per unit of risk. Advance Auto Parts is currently generating about -0.22 per unit of risk. If you would invest  25,689  in Tractor Supply on February 2, 2024 and sell it today you would earn a total of  1,428  from holding Tractor Supply or generate 5.56% return on investment over 90 days.

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

Tractor Supply  vs.  Advance Auto Parts

Tractor Supply

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Tractor Supply are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of very uncertain fundamental indicators, Tractor Supply displayed solid returns over the last few months and may actually be approaching a breakup point.

Advance Auto Parts

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Advance Auto Parts are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Even with relatively uncertain basic indicators, Advance Auto may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Pair Trading with Tractor Supply and Advance Auto

The main advantage of trading using opposite Tractor Supply and Advance Auto positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Tractor Supply 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 Tractor Supply 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .