Correlation Between WATSCO INC and Fastenal

Can any of the company-specific risk be diversified away by investing in both WATSCO INC 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 INC 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 B and Fastenal Company, you can compare the effects of market volatilities on WATSCO INC 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 INC with a short position of Fastenal. Check out your portfolio center. Please also check ongoing floating volatility patterns of WATSCO INC and Fastenal.

Diversification Opportunities for WATSCO INC and Fastenal

-0.43

Correlation Coefficient

WATSCO INC  Fastenal

Very good diversification

The 3 months correlation between WATSCO and Fastenal is -0.43. Overlapping area represents the amount of risk that can be diversified away by holding WATSCO INC B and Fastenal Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Fastenal and WATSCO INC 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 B 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 INC i.e., WATSCO INC and Fastenal go up and down completely randomly.

Pair Corralation between WATSCO INC and Fastenal

Assuming the 90 days trading horizon WATSCO INC B is expected to generate 1.59 times more return on investment than Fastenal. However, WATSCO INC is 1.59 times more volatile than Fastenal Company. It trades about 0.06 of its potential returns per unit of risk. Fastenal Company is currently generating about 0.07 per unit of risk. If you would invest  23,623  in WATSCO INC B on September 26, 2024 and sell it today you would earn a total of  17,777  from holding WATSCO INC B or generate 75.25% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	99.79%
Values	Daily Returns

WATSCO INC B  vs.  Fastenal Company

WATSCO INC B

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days WATSCO INC B has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, WATSCO INC is not utilizing all of its potentials. The current 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 INC and Fastenal

The main advantage of trading using opposite WATSCO INC and Fastenal positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if WATSCO INC 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 B 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.

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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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.