Correlation Between CarGurus and Lithia Motors

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

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

Diversification Opportunities for CarGurus and Lithia Motors

0.84

Correlation Coefficient

CarGurus  Lithia Motors

Very poor diversification

The 3 months correlation between CarGurus and Lithia is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding CarGurus and Lithia Motors in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lithia Motors and CarGurus 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 CarGurus are associated (or correlated) with Lithia Motors. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lithia Motors has no effect on the direction of CarGurus i.e., CarGurus and Lithia Motors go up and down completely randomly.

Pair Corralation between CarGurus and Lithia Motors

Given the investment horizon of 90 days CarGurus is expected to under-perform the Lithia Motors. In addition to that, CarGurus is 1.41 times more volatile than Lithia Motors. It trades about -0.12 of its total potential returns per unit of risk. Lithia Motors is currently generating about -0.13 per unit of volatility. If you would invest  35,646  in Lithia Motors on December 29, 2024 and sell it today you would lose (6,069) from holding Lithia Motors or give up 17.03% of portfolio value over 90 days.

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

CarGurus  vs.  Lithia Motors

CarGurus

Risk-Adjusted Performance

Very Weak

Over the last 90 days CarGurus has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Lithia Motors

Risk-Adjusted Performance

Very Weak

Over the last 90 days Lithia Motors has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of inconsistent performance in the last few months, the Stock's basic indicators remain rather sound which may send shares a bit higher in April 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Pair Trading with CarGurus and Lithia Motors

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

The idea behind CarGurus and Lithia Motors 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.

Check out your portfolio center.

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 Money Managers module to screen money managers from public funds and ETFs managed around the world.