Correlation Between Auto Trader and Wesfarmers

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

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

Diversification Opportunities for Auto Trader and Wesfarmers

0.5

Correlation Coefficient

Auto Trader  Wesfarmers

Very weak diversification

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

Pair Corralation between Auto Trader and Wesfarmers

Assuming the 90 days trading horizon Auto Trader Group is expected to under-perform the Wesfarmers. But the stock apears to be less risky and, when comparing its historical volatility, Auto Trader Group is 1.07 times less risky than Wesfarmers. The stock trades about -0.07 of its potential returns per unit of risk. The Wesfarmers Limited is currently generating about -0.04 of returns per unit of risk over similar time horizon. If you would invest  4,241  in Wesfarmers Limited on December 22, 2024 and sell it today you would lose (163.00) from holding Wesfarmers Limited or give up 3.84% of portfolio value over 90 days.

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

Auto Trader Group  vs.  Wesfarmers Limited

Auto Trader Group

Risk-Adjusted Performance

Very Weak

Over the last 90 days Auto Trader Group has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, Auto Trader is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

Wesfarmers Limited

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Auto Trader and Wesfarmers

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

The idea behind Auto Trader Group and Wesfarmers Limited 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.