Correlation Between Pool and Watsco

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

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

Diversification Opportunities for Pool and Watsco

0.14

Correlation Coefficient

Pool  Watsco

Average diversification

The 3 months correlation between Pool and Watsco is 0.14. Overlapping area represents the amount of risk that can be diversified away by holding Pool Corp. and Watsco Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Watsco Inc and Pool 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 Pool Corporation 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 Pool i.e., Pool and Watsco go up and down completely randomly.

Pair Corralation between Pool and Watsco

Given the investment horizon of 90 days Pool Corporation is expected to under-perform the Watsco. In addition to that, Pool is 3.18 times more volatile than Watsco Inc. It trades about -0.07 of its total potential returns per unit of risk. Watsco Inc is currently generating about 0.22 per unit of volatility. If you would invest  51,970  in Watsco Inc on September 21, 2024 and sell it today you would earn a total of  1,530  from holding Watsco Inc or generate 2.94% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	95.45%
Values	Daily Returns

Pool Corp.  vs.  Watsco Inc

Pool

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Pool Corporation has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent basic indicators, Pool is not utilizing all of its potentials. The recent stock price mess, may contribute to short-term losses for the institutional investors.

Watsco Inc

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Watsco Inc are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite somewhat conflicting basic indicators, Watsco may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Pool and Watsco

The main advantage of trading using opposite Pool and Watsco positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Pool 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 Pool Corporation 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.