Correlation Between DOW and Advance Auto

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Can any of the company-specific risk be diversified away by investing in both DOW and Advance Auto 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 DOW and Advance Auto into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between DOW and Advance Auto Parts, you can compare the effects of market volatilities on DOW and Advance Auto 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 DOW with a short position of Advance Auto. Check out your portfolio center. Please also check ongoing floating volatility patterns of DOW and Advance Auto.

Diversification Opportunities for DOW and Advance Auto

0.84
  Correlation Coefficient

Very poor diversification

The 3 months correlation between DOW and Advance is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding DOW and Advance Auto Parts in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Advance Auto Parts and DOW 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 DOW are associated (or correlated) with Advance Auto. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Advance Auto Parts has no effect on the direction of DOW i.e., DOW and Advance Auto go up and down completely randomly.
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Pair Corralation between DOW and Advance Auto

Given the investment horizon of 90 days DOW is expected to generate 0.58 times more return on investment than Advance Auto. However, DOW is 1.74 times less risky than Advance Auto. It trades about -0.11 of its potential returns per unit of risk. Advance Auto Parts is currently generating about -0.11 per unit of risk. If you would invest  3,306,150  in DOW on April 2, 2022 and sell it today you would lose (239,637)  from holding DOW or give up 7.25% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy100.0%
ValuesDaily Returns

DOW  vs.  Advance Auto Parts

 Performance (%) 
      Timeline 

DOW and Advance Auto Volatility Contrast

 Predicted Return Density 
      Returns 

DOW

Pair trading matchups for DOW

Arca Biopharma vs. DOW
RENEWI PLC vs. DOW
Liquidia Corp vs. DOW
Vmware vs. DOW
Seneca Foods vs. DOW
Cyclacel Pharmaceuti vs. DOW
ATT vs. DOW
Context Therapeutics vs. DOW
Solo Brands vs. DOW
International Business vs. DOW
Alzamend Neuro vs. DOW
Calyxt vs. DOW
The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against DOW as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. DOW's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, DOW's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to DOW.

Pair Trading with DOW and Advance Auto

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

DOW

Pair trading matchups for DOW

Alzamend Neuro vs. DOW
Vmware vs. DOW
Alphabet vs. DOW
Seneca Foods vs. DOW
Solo Brands vs. DOW
International Business vs. DOW
GLAXOSMITHKLINE PLC vs. DOW
Sentinelone Inc vs. DOW
MITIE GROUP vs. DOW
Novan vs. DOW
ATT vs. DOW
Cyclacel Pharmaceuti vs. DOW
The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against DOW as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. DOW's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, DOW's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to DOW.
The idea behind DOW and Advance Auto Parts 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.
Check out your portfolio center. 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.

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