Correlation Between Costco Wholesale and Automatic Data

Can any of the company-specific risk be diversified away by investing in both Costco Wholesale and Automatic Data 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 Automatic Data 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 Automatic Data Processing, you can compare the effects of market volatilities on Costco Wholesale and Automatic Data 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 Automatic Data. Check out your portfolio center. Please also check ongoing floating volatility patterns of Costco Wholesale and Automatic Data.

Diversification Opportunities for Costco Wholesale and Automatic Data

0.9

Correlation Coefficient

Costco Wholesale  Automatic Data

Almost no diversification

The 3 months correlation between Costco and Automatic is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Costco Wholesale Corp and Automatic Data Processing in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Automatic Data Processing 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 Automatic Data. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Automatic Data Processing has no effect on the direction of Costco Wholesale i.e., Costco Wholesale and Automatic Data go up and down completely randomly.

Pair Corralation between Costco Wholesale and Automatic Data

Assuming the 90 days trading horizon Costco Wholesale Corp is expected to under-perform the Automatic Data. In addition to that, Costco Wholesale is 1.2 times more volatile than Automatic Data Processing. It trades about -0.07 of its total potential returns per unit of risk. Automatic Data Processing is currently generating about -0.04 per unit of volatility. If you would invest  28,157  in Automatic Data Processing on December 22, 2024 and sell it today you would lose (1,027) from holding Automatic Data Processing or give up 3.65% of portfolio value over 90 days.

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

Costco Wholesale Corp  vs.  Automatic Data Processing

Costco Wholesale Corp

Risk-Adjusted Performance

Very Weak

Over the last 90 days Costco Wholesale Corp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Stock's basic indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

Automatic Data Processing

Risk-Adjusted Performance

Very Weak

Over the last 90 days Automatic Data Processing has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Automatic Data is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Costco Wholesale and Automatic Data

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

The idea behind Costco Wholesale Corp and Automatic Data Processing 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 Global Markets Map module to get a quick overview of global market snapshot using zoomable world map. Drill down to check world indexes.