Correlation Between Fastenal and DXP Enterprises

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

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

Diversification Opportunities for Fastenal and DXP Enterprises

0.3

Correlation Coefficient

Fastenal  DXP Enterprises

Weak diversification

The 3 months correlation between Fastenal and DXP is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding Fastenal Company and DXP Enterprises in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DXP Enterprises and Fastenal 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 Fastenal Company 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 Fastenal i.e., Fastenal and DXP Enterprises go up and down completely randomly.

Pair Corralation between Fastenal and DXP Enterprises

Given the investment horizon of 90 days Fastenal Company is expected to under-perform the DXP Enterprises. But the stock apears to be less risky and, when comparing its historical volatility, Fastenal Company is 1.2 times less risky than DXP Enterprises. The stock trades about -0.24 of its potential returns per unit of risk. The DXP Enterprises is currently generating about -0.09 of returns per unit of risk over similar time horizon. If you would invest  5,459  in DXP Enterprises on February 4, 2024 and sell it today you would lose (226.00) from holding DXP Enterprises or give up 4.14% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	100.0%
Values	Daily Returns

Fastenal Company  vs.  DXP Enterprises

Fastenal

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Fastenal Company has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Fastenal is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

DXP Enterprises

Risk-Adjusted Performance

20 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in DXP Enterprises are ranked lower than 20 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak basic indicators, DXP Enterprises exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Fastenal and DXP Enterprises

The main advantage of trading using opposite Fastenal and DXP Enterprises positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Fastenal 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 Fastenal Company 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.