Correlation Between Advance Auto and Five Below

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

Diversification Opportunities for Advance Auto and Five Below

-0.1
  Correlation Coefficient

Good diversification

The 3 months correlation between Advance and Five is -0.1. Overlapping area represents the amount of risk that can be diversified away by holding Advance Auto Parts and Five Below in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Five Below and Advance Auto 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 Advance Auto Parts are associated (or correlated) with Five Below. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Five Below has no effect on the direction of Advance Auto i.e., Advance Auto and Five Below go up and down completely randomly.

Pair Corralation between Advance Auto and Five Below

Considering the 90-day investment horizon Advance Auto Parts is expected to generate 0.47 times more return on investment than Five Below. However, Advance Auto Parts is 2.14 times less risky than Five Below. It trades about 0.65 of its potential returns per unit of risk. Five Below is currently generating about -0.09 per unit of risk. If you would invest  6,642  in Advance Auto Parts on December 30, 2023 and sell it today you would earn a total of  1,867  from holding Advance Auto Parts or generate 28.11% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthInsignificant
Accuracy100.0%
ValuesDaily Returns

Advance Auto Parts  vs.  Five Below

 Performance 
       Timeline  
Advance Auto Parts 

Risk-Adjusted Performance

20 of 100

 
Low
 
High
Solid
Compared to the overall equity markets, risk-adjusted returns on investments in Advance Auto Parts are ranked lower than 20 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak basic indicators, Advance Auto reported solid returns over the last few months and may actually be approaching a breakup point.
Five Below 

Risk-Adjusted Performance

0 of 100

 
Low
 
High
Very Weak
Over the last 90 days Five Below has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of conflicting performance in the last few months, the Stock's basic indicators remain rather sound which may send shares a bit higher in April 2024. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Advance Auto and Five Below Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Advance Auto and Five Below

The main advantage of trading using opposite Advance Auto and Five Below positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Advance Auto position performs unexpectedly, Five Below 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 Five Below will offset losses from the drop in Five Below's long position.
The idea behind Advance Auto Parts and Five Below 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 the Transaction History module to view history of all your transactions and understand their impact on performance.

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