Correlation Between Carsales and Bowhead Specialty

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

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

Diversification Opportunities for Carsales and Bowhead Specialty

-0.62

Correlation Coefficient

Carsales  Bowhead Specialty

Excellent diversification

The 3 months correlation between Carsales and Bowhead is -0.62. Overlapping area represents the amount of risk that can be diversified away by holding CarsalesCom Ltd ADR and Bowhead Specialty Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Bowhead Specialty and Carsales 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 CarsalesCom Ltd ADR are associated (or correlated) with Bowhead Specialty. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Bowhead Specialty has no effect on the direction of Carsales i.e., Carsales and Bowhead Specialty go up and down completely randomly.

Pair Corralation between Carsales and Bowhead Specialty

Assuming the 90 days horizon CarsalesCom Ltd ADR is expected to under-perform the Bowhead Specialty. In addition to that, Carsales is 1.7 times more volatile than Bowhead Specialty Holdings. It trades about -0.01 of its total potential returns per unit of risk. Bowhead Specialty Holdings is currently generating about 0.16 per unit of volatility. If you would invest  3,455  in Bowhead Specialty Holdings on December 30, 2024 and sell it today you would earn a total of  760.00  from holding Bowhead Specialty Holdings or generate 22.0% return on investment over 90 days.

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

CarsalesCom Ltd ADR  vs.  Bowhead Specialty Holdings

CarsalesCom ADR

Risk-Adjusted Performance

Very Weak

Over the last 90 days CarsalesCom Ltd ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Carsales is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Bowhead Specialty

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Bowhead Specialty Holdings are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Bowhead Specialty showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Carsales and Bowhead Specialty

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

The idea behind CarsalesCom Ltd ADR and Bowhead Specialty Holdings 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.