Correlation Between Wayfair and Tile Shop

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

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

Diversification Opportunities for Wayfair and Tile Shop

0.4

Correlation Coefficient

Wayfair  Tile Shop

Very weak diversification

The 3 months correlation between Wayfair and Tile is 0.4. Overlapping area represents the amount of risk that can be diversified away by holding Wayfair and Tile Shop Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tile Shop Holdings and Wayfair 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 Wayfair are associated (or correlated) with Tile Shop. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tile Shop Holdings has no effect on the direction of Wayfair i.e., Wayfair and Tile Shop go up and down completely randomly.

Pair Corralation between Wayfair and Tile Shop

Taking into account the 90-day investment horizon Wayfair is expected to generate 2.31 times more return on investment than Tile Shop. However, Wayfair is 2.31 times more volatile than Tile Shop Holdings. It trades about 0.12 of its potential returns per unit of risk. Tile Shop Holdings is currently generating about -0.02 per unit of risk. If you would invest  4,878  in Wayfair on February 21, 2024 and sell it today you would earn a total of  1,526  from holding Wayfair or generate 31.28% return on investment over 90 days.

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

Wayfair  vs.  Tile Shop Holdings

Wayfair

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Wayfair are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of fairly inconsistent basic indicators, Wayfair showed solid returns over the last few months and may actually be approaching a breakup point.

Tile Shop Holdings

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Tile Shop Holdings has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong basic indicators, Tile Shop is not utilizing all of its potentials. The current stock price confusion, may contribute to short-horizon losses for the traders.

Pair Trading with Wayfair and Tile Shop

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

The idea behind Wayfair and Tile Shop Holdings 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 Competition Analyzer module to analyze and compare many basic indicators for a group of related or unrelated entities.