Correlation Between Advanced Drainage and Beacon Roofing

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

By analyzing existing cross correlation between Advanced Drainage Systems and Beacon Roofing Supply, you can compare the effects of market volatilities on Advanced Drainage and Beacon Roofing 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 Advanced Drainage with a short position of Beacon Roofing. Check out your portfolio center. Please also check ongoing floating volatility patterns of Advanced Drainage and Beacon Roofing.

Diversification Opportunities for Advanced Drainage and Beacon Roofing

-0.45

Correlation Coefficient

Advanced Drainage  Beacon Roofing

Very good diversification

The 3 months correlation between Advanced and Beacon is -0.45. Overlapping area represents the amount of risk that can be diversified away by holding Advanced Drainage Systems and Beacon Roofing Supply in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Beacon Roofing Supply and Advanced Drainage 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 Advanced Drainage Systems are associated (or correlated) with Beacon Roofing. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Beacon Roofing Supply has no effect on the direction of Advanced Drainage i.e., Advanced Drainage and Beacon Roofing go up and down completely randomly.

Pair Corralation between Advanced Drainage and Beacon Roofing

Considering the 90-day investment horizon Advanced Drainage is expected to generate 1.71 times less return on investment than Beacon Roofing. In addition to that, Advanced Drainage is 1.11 times more volatile than Beacon Roofing Supply. It trades about 0.04 of its total potential returns per unit of risk. Beacon Roofing Supply is currently generating about 0.07 per unit of volatility. If you would invest  6,036  in Beacon Roofing Supply on October 25, 2024 and sell it today you would earn a total of  5,617  from holding Beacon Roofing Supply or generate 93.06% return on investment over 90 days.

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

Advanced Drainage Systems  vs.  Beacon Roofing Supply

Advanced Drainage Systems

Risk-Adjusted Performance

0 of 100

Very Weak

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

Beacon Roofing Supply

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Beacon Roofing Supply are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of very weak fundamental indicators, Beacon Roofing displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Advanced Drainage and Beacon Roofing

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

The idea behind Advanced Drainage Systems and Beacon Roofing Supply 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.