Correlation Between Transcat and NAPCO Security

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

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

Diversification Opportunities for Transcat and NAPCO Security

0.8

Correlation Coefficient

Transcat  NAPCO Security

Very poor diversification

The 3 months correlation between Transcat and NAPCO is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Transcat and NAPCO Security Technologies in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NAPCO Security Techn and Transcat 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 Transcat are associated (or correlated) with NAPCO Security. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NAPCO Security Techn has no effect on the direction of Transcat i.e., Transcat and NAPCO Security go up and down completely randomly.

Pair Corralation between Transcat and NAPCO Security

Given the investment horizon of 90 days Transcat is expected to generate 0.85 times more return on investment than NAPCO Security. However, Transcat is 1.18 times less risky than NAPCO Security. It trades about -0.12 of its potential returns per unit of risk. NAPCO Security Technologies is currently generating about -0.18 per unit of risk. If you would invest  10,460  in Transcat on December 2, 2024 and sell it today you would lose (2,508) from holding Transcat or give up 23.98% of portfolio value over 90 days.

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

Transcat  vs.  NAPCO Security Technologies

Transcat

Risk-Adjusted Performance

Very Weak

Over the last 90 days Transcat has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unsteady performance in the last few months, the Stock's basic indicators remain comparatively stable which may send shares a bit higher in April 2025. The newest uproar may also be a sign of mid-term up-swing for the firm private investors.

NAPCO Security Techn

Risk-Adjusted Performance

Very Weak

Over the last 90 days NAPCO Security Technologies has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of uncertain performance in the last few months, the Stock's basic indicators remain rather sound which may send shares a bit higher in April 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Pair Trading with Transcat and NAPCO Security

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

The idea behind Transcat and NAPCO Security Technologies 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.