Correlation Between Automatic Data and LKQ Corp

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

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

Diversification Opportunities for Automatic Data and LKQ Corp

0.66

Correlation Coefficient

Automatic Data  LKQ Corp

Poor diversification

The 3 months correlation between Automatic and LKQ is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding Automatic Data Processing and LKQ Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LKQ Corp and Automatic Data 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 Automatic Data Processing are associated (or correlated) with LKQ Corp. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of LKQ Corp has no effect on the direction of Automatic Data i.e., Automatic Data and LKQ Corp go up and down completely randomly.

Pair Corralation between Automatic Data and LKQ Corp

Assuming the 90 days horizon Automatic Data Processing is expected to generate 1.26 times more return on investment than LKQ Corp. However, Automatic Data is 1.26 times more volatile than LKQ Corp. It trades about -0.05 of its potential returns per unit of risk. LKQ Corp is currently generating about -0.22 per unit of risk. If you would invest  27,893  in Automatic Data Processing on October 11, 2024 and sell it today you would lose (408.00) from holding Automatic Data Processing or give up 1.46% of portfolio value over 90 days.

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

Automatic Data Processing  vs.  LKQ Corp

Automatic Data Processing

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Automatic Data Processing are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Automatic Data is not utilizing all of its potentials. The newest stock price disturbance, may contribute to mid-run losses for the stockholders.

LKQ Corp

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days LKQ Corp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, LKQ Corp is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Automatic Data and LKQ Corp

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

The idea behind Automatic Data Processing and LKQ Corp 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.