Correlation Between Target and Best Buy

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

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

Diversification Opportunities for Target and Best Buy

-0.56

Correlation Coefficient

Target  Best Buy

Excellent diversification

The 3 months correlation between Target and Best is -0.56. Overlapping area represents the amount of risk that can be diversified away by holding Target and Best Buy Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Best Buy and Target 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 Target are associated (or correlated) with Best Buy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Best Buy has no effect on the direction of Target i.e., Target and Best Buy go up and down completely randomly.

Pair Corralation between Target and Best Buy

Considering the 90-day investment horizon Target is expected to under-perform the Best Buy. But the stock apears to be less risky and, when comparing its historical volatility, Target is 1.02 times less risky than Best Buy. The stock trades about -0.04 of its potential returns per unit of risk. The Best Buy Co is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  8,996  in Best Buy Co on December 1, 2024 and sell it today you would lose (5.00) from holding Best Buy Co or give up 0.06% of portfolio value over 90 days.

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

Target  vs.  Best Buy Co

Target

Risk-Adjusted Performance

Very Weak

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

Best Buy

Risk-Adjusted Performance

Very Weak

Over the last 90 days Best Buy Co has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong fundamental drivers, Best Buy is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Target and Best Buy

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

The idea behind Target and Best Buy Co 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.