Correlation Between Watsco and BlueLinx Holdings

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

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

Diversification Opportunities for Watsco and BlueLinx Holdings

0.81

Correlation Coefficient

Watsco  BlueLinx Holdings

Very poor diversification

The 3 months correlation between Watsco and BlueLinx is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Watsco Inc and BlueLinx Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BlueLinx Holdings 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 BlueLinx Holdings. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BlueLinx Holdings has no effect on the direction of Watsco i.e., Watsco and BlueLinx Holdings go up and down completely randomly.

Pair Corralation between Watsco and BlueLinx Holdings

Assuming the 90 days horizon Watsco is expected to generate 2.55 times less return on investment than BlueLinx Holdings. But when comparing it to its historical volatility, Watsco Inc is 1.41 times less risky than BlueLinx Holdings. It trades about 0.1 of its potential returns per unit of risk. BlueLinx Holdings is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  9,565  in BlueLinx Holdings on August 31, 2024 and sell it today you would earn a total of  2,948  from holding BlueLinx Holdings or generate 30.82% 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.  BlueLinx Holdings

Watsco Inc

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Watsco Inc are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite somewhat unsteady basic indicators, Watsco may actually be approaching a critical reversion point that can send shares even higher in December 2024.

BlueLinx Holdings

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in BlueLinx Holdings are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, BlueLinx Holdings exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Watsco and BlueLinx Holdings

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

The idea behind Watsco Inc and BlueLinx Holdings 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 Insider Screener module to find insiders across different sectors to evaluate their impact on performance.