Correlation Between Inchcape Plc and Lithia Motors

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

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

Diversification Opportunities for Inchcape Plc and Lithia Motors

-0.35

Correlation Coefficient

Inchcape Plc  Lithia Motors

Very good diversification

The 3 months correlation between Inchcape and Lithia is -0.35. Overlapping area represents the amount of risk that can be diversified away by holding Inchcape plc and Lithia Motors in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lithia Motors and Inchcape Plc 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 Inchcape plc 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 Inchcape Plc i.e., Inchcape Plc and Lithia Motors go up and down completely randomly.

Pair Corralation between Inchcape Plc and Lithia Motors

Assuming the 90 days trading horizon Inchcape plc is expected to under-perform the Lithia Motors. But the stock apears to be less risky and, when comparing its historical volatility, Inchcape plc is 1.4 times less risky than Lithia Motors. The stock trades about -0.02 of its potential returns per unit of risk. The Lithia Motors is currently generating about 0.27 of returns per unit of risk over similar time horizon. If you would invest  24,163  in Lithia Motors on September 13, 2024 and sell it today you would earn a total of  11,437  from holding Lithia Motors or generate 47.33% return on investment over 90 days.

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

Inchcape plc  vs.  Lithia Motors

Inchcape plc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Inchcape plc has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable fundamental indicators, Inchcape Plc is not utilizing all of its potentials. The newest stock price disturbance, may contribute to mid-run losses for the stockholders.

Lithia Motors

Risk-Adjusted Performance

21 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Lithia Motors are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Lithia Motors reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Inchcape Plc and Lithia Motors

The main advantage of trading using opposite Inchcape Plc and Lithia Motors positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Inchcape Plc 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 Inchcape plc 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.

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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 Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.