Correlation Between B of A and Advance Auto

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

Diversification Opportunities for B of A and Advance Auto

0.55
  Correlation Coefficient

Very weak diversification

The 3 months correlation between B of A and Advance is 0.55. Overlapping area represents the amount of risk that can be diversified away by holding Bank Of America 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 B of A 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 Bank Of America 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 B of A i.e., B of A and Advance Auto go up and down completely randomly.

Pair Corralation between B of A and Advance Auto

Considering the 90-day investment horizon Bank Of America is expected to generate 0.87 times more return on investment than Advance Auto. However, Bank Of America is 1.14 times less risky than Advance Auto. It trades about 0.01 of its potential returns per unit of risk. Advance Auto Parts is currently generating about -0.03 per unit of risk. If you would invest  3,487  in Bank Of America on May 12, 2022 and sell it today you would lose (13.00)  from holding Bank Of America or give up 0.37% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthWeak
Accuracy100.0%
ValuesDaily Returns

Bank Of America  vs.  Advance Auto Parts

 Performance (%) 
       Timeline  
Bank Of America 
B of A Performance
0 of 100
Over the last 90 days Bank Of America has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, B of A is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

B of A Price Channel

Advance Auto Parts 
Advance Performance
0 of 100
Over the last 90 days Advance Auto Parts has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Advance Auto is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the insiders.

Advance Price Channel

B of A and Advance Auto Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with B of A and Advance Auto

The main advantage of trading using opposite B of A and Advance Auto positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if B of A 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.
The idea behind Bank Of America 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.

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