Correlation Between Carsales and Cars
Can any of the company-specific risk be diversified away by investing in both Carsales and Cars 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 Carsales and Cars into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Carsales and Cars Inc, you can compare the effects of market volatilities on Carsales and Cars 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 Carsales with a short position of Cars. Check out your portfolio center. Please also check ongoing floating volatility patterns of Carsales and Cars.
Diversification Opportunities for Carsales and Cars
Poor diversification
The 3 months correlation between Carsales and Cars is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding Carsales and Cars Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cars Inc and Carsales 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 Carsales are associated (or correlated) with Cars. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cars Inc has no effect on the direction of Carsales i.e., Carsales and Cars go up and down completely randomly.
Pair Corralation between Carsales and Cars
Assuming the 90 days trading horizon Carsales is expected to generate 0.67 times more return on investment than Cars. However, Carsales is 1.48 times less risky than Cars. It trades about 0.11 of its potential returns per unit of risk. Cars Inc is currently generating about 0.01 per unit of risk. If you would invest 2,045 in Carsales on September 2, 2024 and sell it today you would earn a total of 495.00 from holding Carsales or generate 24.21% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Carsales vs. Cars Inc
Performance |
| Timeline |
| Carsales |
| Cars Inc |
Carsales and Cars Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Carsales and Cars
The main advantage of trading using opposite Carsales and Cars positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Carsales position performs unexpectedly, Cars 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 Cars will offset losses from the drop in Cars' long position.The idea behind Carsales and Cars Inc 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.| Cars vs. Ameriprise Financial | Cars vs. PENN NATL GAMING | Cars vs. QBE Insurance Group | Cars vs. FRACTAL GAMING GROUP |
Check out your portfolio center.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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.
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