Correlation Between Advanced Drainage and Trex

Can any of the company-specific risk be diversified away by investing in both Advanced Drainage and Trex 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 Trex 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 Trex Company, you can compare the effects of market volatilities on Advanced Drainage and Trex 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 Trex. Check out your portfolio center. Please also check ongoing floating volatility patterns of Advanced Drainage and Trex.

Diversification Opportunities for Advanced Drainage and Trex

-0.46

Correlation Coefficient

Advanced Drainage  Trex

Very good diversification

The 3 months correlation between Advanced and Trex is -0.46. Overlapping area represents the amount of risk that can be diversified away by holding Advanced Drainage Systems and Trex Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Trex Company 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 Trex. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Trex Company has no effect on the direction of Advanced Drainage i.e., Advanced Drainage and Trex go up and down completely randomly.

Pair Corralation between Advanced Drainage and Trex

Considering the 90-day investment horizon Advanced Drainage Systems is expected to generate 0.6 times more return on investment than Trex. However, Advanced Drainage Systems is 1.67 times less risky than Trex. It trades about -0.39 of its potential returns per unit of risk. Trex Company is currently generating about -0.33 per unit of risk. If you would invest  12,824  in Advanced Drainage Systems on October 11, 2024 and sell it today you would lose (1,322) from holding Advanced Drainage Systems or give up 10.31% of portfolio value over 90 days.

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

Advanced Drainage Systems  vs.  Trex Company

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.

Trex Company

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Trex Company are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong technical and fundamental indicators, Trex is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Advanced Drainage and Trex

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

The idea behind Advanced Drainage Systems and Trex 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.