Correlation Between Build A and Advance Auto

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

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

Diversification Opportunities for Build A and Advance Auto

0.9

Correlation Coefficient

Build A  Advance Auto

Almost no diversification

The 3 months correlation between Build and Advance is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Build A Bear Workshop 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 Build A 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 Build A Bear Workshop 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 Build A i.e., Build A and Advance Auto go up and down completely randomly.

Pair Corralation between Build A and Advance Auto

Considering the 90-day investment horizon Build A Bear Workshop is expected to generate 0.46 times more return on investment than Advance Auto. However, Build A Bear Workshop is 2.16 times less risky than Advance Auto. It trades about -0.18 of its potential returns per unit of risk. Advance Auto Parts is currently generating about -0.12 per unit of risk. If you would invest  2,899  in Build A Bear Workshop on January 20, 2024 and sell it today you would lose (145.00) from holding Build A Bear Workshop or give up 5.0% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	95.65%
Values	Daily Returns

Build A Bear Workshop  vs.  Advance Auto Parts

Build A Bear

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Build A Bear Workshop are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak fundamental drivers, Build A showed solid returns over the last few months and may actually be approaching a breakup point.

Advance Auto Parts

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Advance Auto Parts are ranked lower than 9 (%) 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 Build A and Advance Auto

The main advantage of trading using opposite Build A and Advance Auto positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Build A 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 Build A Bear Workshop 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 Portfolio Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.