Correlation Between American Eagle and Advance Auto

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

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

Diversification Opportunities for American Eagle and Advance Auto

0.73

Correlation Coefficient

American Eagle  Advance Auto

Poor diversification

The 3 months correlation between American and Advance is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding American Eagle Outfitters 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 American Eagle 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 American Eagle Outfitters 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 American Eagle i.e., American Eagle and Advance Auto go up and down completely randomly.

Pair Corralation between American Eagle and Advance Auto

Considering the 90-day investment horizon American Eagle Outfitters is expected to generate 1.14 times more return on investment than Advance Auto. However, American Eagle is 1.14 times more volatile than Advance Auto Parts. It trades about -0.06 of its potential returns per unit of risk. Advance Auto Parts is currently generating about -0.41 per unit of risk. If you would invest  2,340  in American Eagle Outfitters on January 17, 2024 and sell it today you would lose (75.00) from holding American Eagle Outfitters or give up 3.21% of portfolio value over 90 days.

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

American Eagle Outfitters  vs.  Advance Auto Parts

American Eagle Outfitters

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in American Eagle Outfitters are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of very fragile technical and fundamental indicators, American Eagle may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Advance Auto Parts

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Advance Auto Parts are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Even with relatively unfluctuating basic indicators, Advance Auto reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with American Eagle and Advance Auto

The main advantage of trading using opposite American Eagle and Advance Auto positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if American Eagle 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 American Eagle Outfitters 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.