Correlation Between Eagle Point and Watsco

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

By analyzing existing cross correlation between Eagle Point Credit and Watsco Inc, you can compare the effects of market volatilities on Eagle Point and Watsco 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 Eagle Point with a short position of Watsco. Check out your portfolio center. Please also check ongoing floating volatility patterns of Eagle Point and Watsco.

Diversification Opportunities for Eagle Point and Watsco

0.39

Correlation Coefficient

Eagle Point  Watsco

Weak diversification

The 3 months correlation between Eagle and Watsco is 0.39. Overlapping area represents the amount of risk that can be diversified away by holding Eagle Point Credit and Watsco Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Watsco Inc and Eagle Point 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 Eagle Point Credit are associated (or correlated) with Watsco. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Watsco Inc has no effect on the direction of Eagle Point i.e., Eagle Point and Watsco go up and down completely randomly.

Pair Corralation between Eagle Point and Watsco

Given the investment horizon of 90 days Eagle Point is expected to generate 4.08 times less return on investment than Watsco. But when comparing it to its historical volatility, Eagle Point Credit is 3.5 times less risky than Watsco. It trades about 0.08 of its potential returns per unit of risk. Watsco Inc is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  24,258  in Watsco Inc on September 26, 2024 and sell it today you would earn a total of  24,536  from holding Watsco Inc or generate 101.15% return on investment over 90 days.

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

Eagle Point Credit  vs.  Watsco Inc

Eagle Point Credit

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Eagle Point Credit has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable fundamental indicators, Eagle Point is not utilizing all of its potentials. The recent stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Watsco Inc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Watsco Inc has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Watsco is not utilizing all of its potentials. The newest stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Eagle Point and Watsco

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

The idea behind Eagle Point Credit and Watsco Inc 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.