Correlation Between CarMax and Sonic Automotive

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

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

Diversification Opportunities for CarMax and Sonic Automotive

0.72

Correlation Coefficient

CarMax  Sonic Automotive

Poor diversification

The 3 months correlation between CarMax and Sonic is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding CarMax Inc and Sonic Automotive in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sonic Automotive and CarMax 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 CarMax Inc are associated (or correlated) with Sonic Automotive. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sonic Automotive has no effect on the direction of CarMax i.e., CarMax and Sonic Automotive go up and down completely randomly.

Pair Corralation between CarMax and Sonic Automotive

Considering the 90-day investment horizon CarMax Inc is expected to under-perform the Sonic Automotive. But the stock apears to be less risky and, when comparing its historical volatility, CarMax Inc is 1.1 times less risky than Sonic Automotive. The stock trades about -0.09 of its potential returns per unit of risk. The Sonic Automotive is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  6,322  in Sonic Automotive on December 27, 2024 and sell it today you would lose (37.00) from holding Sonic Automotive or give up 0.59% of portfolio value over 90 days.

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

CarMax Inc  vs.  Sonic Automotive

CarMax Inc

Risk-Adjusted Performance

Very Weak

Over the last 90 days CarMax Inc has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unfluctuating performance, the Stock's primary indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Sonic Automotive

Risk-Adjusted Performance

Very Weak

Over the last 90 days Sonic Automotive has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong basic indicators, Sonic Automotive is not utilizing all of its potentials. The latest stock price confusion, may contribute to short-horizon losses for the traders.

Pair Trading with CarMax and Sonic Automotive

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

The idea behind CarMax Inc and Sonic Automotive 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 File Import module to quickly import all of your third-party portfolios from your local drive in csv format.