Correlation Between Cars and Ally Financial

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

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

Diversification Opportunities for Cars and Ally Financial

0.24

Correlation Coefficient

Cars  Ally Financial

Modest diversification

The 3 months correlation between Cars and Ally is 0.24. Overlapping area represents the amount of risk that can be diversified away by holding Cars Inc and Ally Financial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ally Financial and Cars 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 Cars Inc are associated (or correlated) with Ally Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ally Financial has no effect on the direction of Cars i.e., Cars and Ally Financial go up and down completely randomly.

Pair Corralation between Cars and Ally Financial

Assuming the 90 days trading horizon Cars is expected to generate 1.3 times less return on investment than Ally Financial. In addition to that, Cars is 1.77 times more volatile than Ally Financial. It trades about 0.06 of its total potential returns per unit of risk. Ally Financial is currently generating about 0.14 per unit of volatility. If you would invest  3,286  in Ally Financial on September 14, 2024 and sell it today you would earn a total of  508.00  from holding Ally Financial or generate 15.46% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	62.5%
Values	Daily Returns

Cars Inc  vs.  Ally Financial

Cars Inc

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Cars Inc are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Cars may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Ally Financial

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Ally Financial are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Ally Financial unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Cars and Ally Financial

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

The idea behind Cars Inc and Ally Financial 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.