Correlation Between Big 5 and Advance Auto

Can any of the company-specific risk be diversified away by investing in both Big 5 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 Big 5 and Advance Auto into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Big 5 Sporting and Advance Auto Parts, you can compare the effects of market volatilities on Big 5 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 Big 5 with a short position of Advance Auto. Check out your portfolio center. Please also check ongoing floating volatility patterns of Big 5 and Advance Auto.

Diversification Opportunities for Big 5 and Advance Auto

0.81

Correlation Coefficient

Big 5  Advance Auto

Very poor diversification

The 3 months correlation between Big and Advance is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Big 5 Sporting 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 Big 5 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 Big 5 Sporting 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 Big 5 i.e., Big 5 and Advance Auto go up and down completely randomly.

Pair Corralation between Big 5 and Advance Auto

Given the investment horizon of 90 days Big 5 Sporting is expected to under-perform the Advance Auto. But the stock apears to be less risky and, when comparing its historical volatility, Big 5 Sporting is 1.24 times less risky than Advance Auto. The stock trades about -0.3 of its potential returns per unit of risk. The Advance Auto Parts is currently generating about -0.04 of returns per unit of risk over similar time horizon. If you would invest  4,580  in Advance Auto Parts on December 28, 2024 and sell it today you would lose (543.00) from holding Advance Auto Parts or give up 11.86% of portfolio value over 90 days.

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

Big 5 Sporting  vs.  Advance Auto Parts

Big 5 Sporting

Risk-Adjusted Performance

Very Weak

Over the last 90 days Big 5 Sporting has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of conflicting performance in the last few months, the Stock's technical and fundamental indicators remain fairly stable which may send shares a bit higher in April 2025. The latest fuss may also be a sign of long-term up-swing for the venture sophisticated investors.

Advance Auto Parts

Risk-Adjusted Performance

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 latest unfluctuating performance, the Stock's basic indicators remain invariable and the latest agitation on Wall Street may also be a sign of long-running gains for the enterprise retail investors.

Pair Trading with Big 5 and Advance Auto

The main advantage of trading using opposite Big 5 and Advance Auto positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Big 5 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 Big 5 Sporting 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.