Correlation Between AUTO TRADER and Carsales

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Can any of the company-specific risk be diversified away by investing in both AUTO TRADER 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 AUTO TRADER and Carsales into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between AUTO TRADER ADR and CarsalesCom, you can compare the effects of market volatilities on AUTO TRADER 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 AUTO TRADER with a short position of Carsales. Check out your portfolio center. Please also check ongoing floating volatility patterns of AUTO TRADER and Carsales.

Diversification Opportunities for AUTO TRADER and Carsales

-0.26
  Correlation Coefficient

Very good diversification

The 3 months correlation between AUTO and Carsales is -0.26. Overlapping area represents the amount of risk that can be diversified away by holding AUTO TRADER ADR and CarsalesCom in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CarsalesCom 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 ADR 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 AUTO TRADER i.e., AUTO TRADER and Carsales go up and down completely randomly.

Pair Corralation between AUTO TRADER and Carsales

Assuming the 90 days trading horizon AUTO TRADER ADR is expected to generate 0.84 times more return on investment than Carsales. However, AUTO TRADER ADR is 1.2 times less risky than Carsales. It trades about -0.35 of its potential returns per unit of risk. CarsalesCom is currently generating about -0.49 per unit of risk. If you would invest  249.00  in AUTO TRADER ADR on October 10, 2024 and sell it today you would lose (15.00) from holding AUTO TRADER ADR or give up 6.02% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthInsignificant
Accuracy100.0%
ValuesDaily Returns

AUTO TRADER ADR  vs.  CarsalesCom

 Performance 
       Timeline  
AUTO TRADER ADR 

Risk-Adjusted Performance

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Very Weak
Over the last 90 days AUTO TRADER ADR has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest uncertain performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.
CarsalesCom 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
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.

AUTO TRADER and Carsales Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with AUTO TRADER and Carsales

The main advantage of trading using opposite AUTO TRADER and Carsales positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if AUTO TRADER 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 AUTO TRADER ADR 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.

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