Correlation Between Watsco and DXP Enterprises

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

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

Diversification Opportunities for Watsco and DXP Enterprises

0.72

Correlation Coefficient

Watsco  DXP Enterprises

Poor diversification

The 3 months correlation between Watsco and DXP is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Watsco Inc and DXP Enterprises in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DXP Enterprises 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 DXP Enterprises. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DXP Enterprises has no effect on the direction of Watsco i.e., Watsco and DXP Enterprises go up and down completely randomly.

Pair Corralation between Watsco and DXP Enterprises

Assuming the 90 days horizon Watsco is expected to generate 2.76 times less return on investment than DXP Enterprises. But when comparing it to its historical volatility, Watsco Inc is 1.89 times less risky than DXP Enterprises. It trades about 0.1 of its potential returns per unit of risk. DXP Enterprises is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  5,500  in DXP Enterprises on August 30, 2024 and sell it today you would earn a total of  1,793  from holding DXP Enterprises or generate 32.6% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.44%
Values	Daily Returns

Watsco Inc  vs.  DXP Enterprises

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.

DXP Enterprises

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in DXP Enterprises are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, DXP Enterprises exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Watsco and DXP Enterprises

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

The idea behind Watsco Inc and DXP Enterprises 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 Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .