Correlation Between Watsco and Fastenal

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

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

Diversification Opportunities for Watsco and Fastenal

0.87

Correlation Coefficient

Watsco  Fastenal

Very poor diversification

The 3 months correlation between Watsco and Fastenal is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Watsco Inc and Fastenal Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Fastenal and Watsco 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 Watsco Inc are associated (or correlated) with Fastenal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Fastenal has no effect on the direction of Watsco i.e., Watsco and Fastenal go up and down completely randomly.

Pair Corralation between Watsco and Fastenal

Assuming the 90 days horizon Watsco is expected to generate 2.41 times less return on investment than Fastenal. In addition to that, Watsco is 1.06 times more volatile than Fastenal Company. It trades about 0.05 of its total potential returns per unit of risk. Fastenal Company is currently generating about 0.13 per unit of volatility. If you would invest  6,312  in Fastenal Company on September 26, 2024 and sell it today you would earn a total of  896.00  from holding Fastenal Company or generate 14.2% return on investment over 90 days.

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

Watsco Inc  vs.  Fastenal Company

Watsco Inc

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Watsco Inc are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Watsco is not utilizing all of its potentials. The newest stock price disturbance, may contribute to mid-run losses for the stockholders.

Fastenal

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Fastenal Company are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Fastenal reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Watsco and Fastenal

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

The idea behind Watsco Inc and Fastenal Company 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.

Check out your portfolio center.

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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.