Correlation Between Advance Auto and American Eagle

Can any of the company-specific risk be diversified away by investing in both Advance Auto and American Eagle 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 American Eagle 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 American Eagle Outfitters, you can compare the effects of market volatilities on Advance Auto and American Eagle 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 American Eagle. Check out your portfolio center. Please also check ongoing floating volatility patterns of Advance Auto and American Eagle.

Diversification Opportunities for Advance Auto and American Eagle

0.5

Correlation Coefficient

Advance Auto  American Eagle

Very weak diversification

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

Pair Corralation between Advance Auto and American Eagle

Considering the 90-day investment horizon Advance Auto Parts is expected to under-perform the American Eagle. In addition to that, Advance Auto is 1.04 times more volatile than American Eagle Outfitters. It trades about -0.18 of its total potential returns per unit of risk. American Eagle Outfitters is currently generating about -0.07 per unit of volatility. If you would invest  2,435  in American Eagle Outfitters on February 23, 2024 and sell it today you would lose (173.00) from holding American Eagle Outfitters or give up 7.1% of portfolio value over 90 days.

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

Advance Auto Parts  vs.  American Eagle Outfitters

Advance Auto Parts

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Advance Auto Parts are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Even with relatively uncertain basic indicators, Advance Auto reported solid returns over the last few months and may actually be approaching a breakup point.

American Eagle Outfitters

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days American Eagle Outfitters has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy technical and fundamental indicators, American Eagle is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Advance Auto and American Eagle

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

The idea behind Advance Auto Parts and American Eagle Outfitters 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 Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.