Correlation Between Advance Auto and RH

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

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

Diversification Opportunities for Advance Auto and RH

-0.23

Correlation Coefficient

Advance Auto  RH

Very good diversification

The 3 months correlation between Advance and RH is -0.23. Overlapping area represents the amount of risk that can be diversified away by holding Advance Auto Parts and RH in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on RH and Advance Auto 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 Advance Auto Parts are associated (or correlated) with RH. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of RH has no effect on the direction of Advance Auto i.e., Advance Auto and RH go up and down completely randomly.

Pair Corralation between Advance Auto and RH

Considering the 90-day investment horizon Advance Auto is expected to generate 28.25 times less return on investment than RH. But when comparing it to its historical volatility, Advance Auto Parts is 1.26 times less risky than RH. It trades about 0.01 of its potential returns per unit of risk. RH is currently generating about 0.19 of returns per unit of risk over similar time horizon. If you would invest  25,370  in RH on August 30, 2024 and sell it today you would earn a total of  13,286  from holding RH or generate 52.37% return on investment over 90 days.

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

Advance Auto Parts  vs.  RH

Advance Auto Parts

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Advance Auto Parts has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable basic indicators, Advance Auto is not utilizing all of its potentials. The recent stock price agitation, may contribute to short-term losses for the retail investors.

RH

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in RH are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Despite fairly uncertain technical indicators, RH demonstrated solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Advance Auto and RH

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

The idea behind Advance Auto Parts and RH 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.