Correlation Between Watsco and Applied Industrial

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

By analyzing existing cross correlation between Watsco Inc and Applied Industrial Technologies, you can compare the effects of market volatilities on Watsco and Applied Industrial 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 Watsco with a short position of Applied Industrial. Check out your portfolio center. Please also check ongoing floating volatility patterns of Watsco and Applied Industrial.

Diversification Opportunities for Watsco and Applied Industrial

-0.5

Correlation Coefficient

Watsco  Applied Industrial

Very good diversification

The 3 months correlation between Watsco and Applied is -0.5. Overlapping area represents the amount of risk that can be diversified away by holding Watsco Inc and Applied Industrial Technologie in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Applied Industrial and Watsco 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 Watsco Inc are associated (or correlated) with Applied Industrial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Applied Industrial has no effect on the direction of Watsco i.e., Watsco and Applied Industrial go up and down completely randomly.

Pair Corralation between Watsco and Applied Industrial

Assuming the 90 days horizon Watsco Inc is expected to under-perform the Applied Industrial. But the stock apears to be less risky and, when comparing its historical volatility, Watsco Inc is 1.71 times less risky than Applied Industrial. The stock trades about -0.02 of its potential returns per unit of risk. The Applied Industrial Technologies is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  22,366  in Applied Industrial Technologies on May 5, 2025 and sell it today you would earn a total of  4,052  from holding Applied Industrial Technologies or generate 18.12% return on investment over 90 days.

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

Watsco Inc  vs.  Applied Industrial Technologie

Watsco Inc

Risk-Adjusted Performance

Very Weak

Over the last 90 days Watsco Inc has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Watsco is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Applied Industrial

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Applied Industrial Technologies are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unfluctuating forward indicators, Applied Industrial unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Watsco and Applied Industrial

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

The idea behind Watsco Inc and Applied Industrial Technologies 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 AI Portfolio Prophet module to use AI to generate optimal portfolios and find profitable investment opportunities.