Can any of the company-specific risk be diversified away by investing in both Costco Wholesale and Aptos 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 Costco Wholesale and Aptos into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Costco Wholesale Corp and Aptos, you can compare the effects of market volatilities on Costco Wholesale and Aptos 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 Costco Wholesale with a short position of Aptos. Check out your portfolio center. Please also check ongoing floating volatility patterns of Costco Wholesale and Aptos.
Diversification Opportunities for Costco Wholesale and Aptos
The 3 months correlation between Costco and Aptos is 0.42. Overlapping area represents the amount of risk that can be diversified away by holding Costco Wholesale Corp and Aptos in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Aptos and Costco Wholesale 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 Costco Wholesale Corp are associated (or correlated) with Aptos. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Aptos has no effect on the direction of Costco Wholesale i.e., Costco Wholesale and Aptos go up and down completely randomly.
Pair Corralation between Costco Wholesale and Aptos
Given the investment horizon of 90 days Costco Wholesale is expected to generate 7.23 times less return on investment than Aptos. But when comparing it to its historical volatility, Costco Wholesale Corp is 3.98 times less risky than Aptos. It trades about 0.09 of its potential returns per unit of risk. Aptos is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest 534.00 in Aptos on September 2, 2023 and sell it today you would earn a total of 161.00 from holding Aptos or generate 30.15% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in Costco Wholesale Corp are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively sluggish basic indicators, Costco Wholesale may actually be approaching a critical reversion point that can send shares even higher in January 2024.
Compared to the overall equity markets, risk-adjusted returns on investments in Aptos are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, Aptos exhibited solid returns over the last few months and may actually be approaching a breakup point.
The main advantage of trading using opposite Costco Wholesale and Aptos positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Costco Wholesale position performs unexpectedly, Aptos 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 Aptos will offset losses from the drop in Aptos' long position.
The idea behind Costco Wholesale Corp and Aptos 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.
Check out your portfolio center.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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.
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