Correlation Between Best Buy and Gap

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

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

Diversification Opportunities for Best Buy and Gap

0.81

Correlation Coefficient

Best Buy  Gap

Very poor diversification

The 3 months correlation between Best and Gap is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Best Buy Co and Gap Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Gap Inc and Best Buy 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 Best Buy Co are associated (or correlated) with Gap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Gap Inc has no effect on the direction of Best Buy i.e., Best Buy and Gap go up and down completely randomly.

Pair Corralation between Best Buy and Gap

Considering the 90-day investment horizon Best Buy is expected to generate 3.63 times less return on investment than Gap. But when comparing it to its historical volatility, Best Buy Co is 1.71 times less risky than Gap. It trades about 0.04 of its potential returns per unit of risk. Gap Inc is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  833.00  in Gap Inc on March 16, 2024 and sell it today you would earn a total of  1,678  from holding Gap Inc or generate 201.44% return on investment over 90 days.

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

Best Buy Co  vs.  Gap Inc

Best Buy

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Best Buy Co are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of fairly uncertain fundamental drivers, Best Buy showed solid returns over the last few months and may actually be approaching a breakup point.

Gap Inc

Risk-Adjusted Performance

2 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Gap Inc are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively conflicting basic indicators, Gap may actually be approaching a critical reversion point that can send shares even higher in July 2024.

Pair Trading with Best Buy and Gap

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

The idea behind Best Buy Co and Gap Inc 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.