Correlation Between Verizon Communications and Advance Auto

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

Diversification Opportunities for Verizon Communications and Advance Auto

-0.4
  Correlation Coefficient

Very good diversification

The 3 months correlation between Verizon and Advance is -0.4. Overlapping area represents the amount of risk that can be diversified away by holding Verizon Communications 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 Verizon Communications 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 Verizon Communications 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 Verizon Communications i.e., Verizon Communications and Advance Auto go up and down completely randomly.

Pair Corralation between Verizon Communications and Advance Auto

Allowing for the 90-day total investment horizon Verizon Communications is expected to under-perform the Advance Auto. But the stock apears to be less risky and, when comparing its historical volatility, Verizon Communications is 1.6 times less risky than Advance Auto. The stock trades about -0.05 of its potential returns per unit of risk. The Advance Auto Parts is currently generating about 0.0 of returns per unit of risk over similar time horizon. If you would invest  20,380  in Advance Auto Parts on May 9, 2022 and sell it today you would lose (1,038)  from holding Advance Auto Parts or give up 5.09% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthVery Weak
Accuracy100.0%
ValuesDaily Returns

Verizon Communications  vs.  Advance Auto Parts

 Performance (%) 
       Timeline  
Verizon Communications 
Verizon Performance
0 of 100
Over the last 90 days Verizon Communications has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Verizon Communications is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Verizon 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 latest stock price disarray, may contribute to short-term losses for the insiders.

Advance Price Channel

Verizon Communications and Advance Auto Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Verizon Communications and Advance Auto

The main advantage of trading using opposite Verizon Communications and Advance Auto positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Verizon Communications 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 Verizon Communications 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.

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