Correlation Between Best Buy and Alcoa Corp

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

By analyzing existing cross correlation between Best Buy Co and Alcoa Corp, you can compare the effects of market volatilities on Best Buy and Alcoa Corp 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 Best Buy with a short position of Alcoa Corp. Check out your portfolio center. Please also check ongoing floating volatility patterns of Best Buy and Alcoa Corp.

Diversification Opportunities for Best Buy and Alcoa Corp

-0.28

Correlation Coefficient

Best Buy  Alcoa Corp

Very good diversification

The 3 months correlation between Best and Alcoa is -0.28. Overlapping area represents the amount of risk that can be diversified away by holding Best Buy Co and Alcoa Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Alcoa Corp and Best Buy 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 Best Buy Co are associated (or correlated) with Alcoa Corp. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Alcoa Corp has no effect on the direction of Best Buy i.e., Best Buy and Alcoa Corp go up and down completely randomly.

Pair Corralation between Best Buy and Alcoa Corp

Considering the 90-day investment horizon Best Buy is expected to generate 1.06 times less return on investment than Alcoa Corp. But when comparing it to its historical volatility, Best Buy Co is 1.72 times less risky than Alcoa Corp. It trades about 0.02 of its potential returns per unit of risk. Alcoa Corp is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  4,922  in Alcoa Corp on August 23, 2024 and sell it today you would lose (300.50) from holding Alcoa Corp or give up 6.11% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

Best Buy Co  vs.  Alcoa Corp

Best Buy

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Best Buy Co has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong fundamental drivers, Best Buy is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Alcoa Corp

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Alcoa Corp are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Alcoa Corp sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Best Buy and Alcoa Corp

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

The idea behind Best Buy Co and Alcoa Corp 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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.