Correlation Between Carvana and KAR Auction

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

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

Diversification Opportunities for Carvana and KAR Auction

0.07

Correlation Coefficient

Carvana  KAR Auction

Significant diversification

The 3 months correlation between Carvana and KAR is 0.07. Overlapping area represents the amount of risk that can be diversified away by holding Carvana Co and KAR Auction Services in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on KAR Auction Services and Carvana 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 Carvana Co are associated (or correlated) with KAR Auction. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of KAR Auction Services has no effect on the direction of Carvana i.e., Carvana and KAR Auction go up and down completely randomly.

Pair Corralation between Carvana and KAR Auction

Given the investment horizon of 90 days Carvana Co is expected to generate 2.5 times more return on investment than KAR Auction. However, Carvana is 2.5 times more volatile than KAR Auction Services. It trades about 0.02 of its potential returns per unit of risk. KAR Auction Services is currently generating about -0.02 per unit of risk. If you would invest  21,055  in Carvana Co on December 28, 2024 and sell it today you would lose (660.00) from holding Carvana Co or give up 3.13% of portfolio value over 90 days.

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

Carvana Co  vs.  KAR Auction Services

Carvana

Risk-Adjusted Performance

Very Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Carvana Co are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Carvana is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

KAR Auction Services

Risk-Adjusted Performance

Insignificant

Over the last 90 days KAR Auction Services has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable basic indicators, KAR Auction is not utilizing all of its potentials. The current stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with Carvana and KAR Auction

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

The idea behind Carvana Co and KAR Auction Services 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.