Correlation Between Azek and Advanced Drainage

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

By analyzing existing cross correlation between Azek Company and Advanced Drainage Systems, you can compare the effects of market volatilities on Azek and Advanced Drainage 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 Azek with a short position of Advanced Drainage. Check out your portfolio center. Please also check ongoing floating volatility patterns of Azek and Advanced Drainage.

Diversification Opportunities for Azek and Advanced Drainage

0.76

Correlation Coefficient

Azek  Advanced Drainage

Poor diversification

The 3 months correlation between Azek and Advanced is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding Azek Company and Advanced Drainage Systems in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Advanced Drainage Systems and Azek 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 Azek Company are associated (or correlated) with Advanced Drainage. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Advanced Drainage Systems has no effect on the direction of Azek i.e., Azek and Advanced Drainage go up and down completely randomly.

Pair Corralation between Azek and Advanced Drainage

Given the investment horizon of 90 days Azek Company is expected to generate 1.62 times more return on investment than Advanced Drainage. However, Azek is 1.62 times more volatile than Advanced Drainage Systems. It trades about 0.03 of its potential returns per unit of risk. Advanced Drainage Systems is currently generating about -0.04 per unit of risk. If you would invest  4,797  in Azek Company on December 28, 2024 and sell it today you would earn a total of  182.00  from holding Azek Company or generate 3.79% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.36%
Values	Daily Returns

Azek Company  vs.  Advanced Drainage Systems

Azek Company

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Azek Company are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite quite weak technical and fundamental indicators, Azek may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Advanced Drainage Systems

Risk-Adjusted Performance

Very Weak

Over the last 90 days Advanced Drainage Systems has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable primary indicators, Advanced Drainage is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Azek and Advanced Drainage

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

The idea behind Azek Company and Advanced Drainage Systems 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 Stock Screener module to find equities using a custom stock filter or screen asymmetry in trading patterns, price, volume, or investment outlook..