Correlation Between Xero and Carsales

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

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

Diversification Opportunities for Xero and Carsales

0.85

Correlation Coefficient

Xero  Carsales

Very poor diversification

The 3 months correlation between Xero and Carsales is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Xero and CarsalesCom in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CarsalesCom and Xero 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 Xero are associated (or correlated) with Carsales. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CarsalesCom has no effect on the direction of Xero i.e., Xero and Carsales go up and down completely randomly.

Pair Corralation between Xero and Carsales

Assuming the 90 days horizon Xero is expected to generate 1.57 times more return on investment than Carsales. However, Xero is 1.57 times more volatile than CarsalesCom. It trades about 0.06 of its potential returns per unit of risk. CarsalesCom is currently generating about 0.06 per unit of risk. If you would invest  7,100  in Xero on October 5, 2024 and sell it today you would earn a total of  3,000  from holding Xero or generate 42.25% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	99.68%
Values	Daily Returns

Xero  vs.  CarsalesCom

Xero

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Xero are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Xero may actually be approaching a critical reversion point that can send shares even higher in February 2025.

CarsalesCom

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days CarsalesCom has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Carsales is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Xero and Carsales

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

The idea behind Xero and CarsalesCom 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 Sync Your Broker module to sync your existing holdings, watchlists, positions or portfolios from thousands of online brokerage services, banks, investment account aggregators and robo-advisors..