Correlation Between Lithia Motors and Sea

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

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

Diversification Opportunities for Lithia Motors and Sea

0.61

Correlation Coefficient

Lithia Motors  Sea

Poor diversification

The 3 months correlation between Lithia and Sea is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding Lithia Motors and Sea in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sea and Lithia Motors 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 Lithia Motors are associated (or correlated) with Sea. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sea has no effect on the direction of Lithia Motors i.e., Lithia Motors and Sea go up and down completely randomly.

Pair Corralation between Lithia Motors and Sea

Considering the 90-day investment horizon Lithia Motors is expected to generate 3.83 times less return on investment than Sea. But when comparing it to its historical volatility, Lithia Motors is 1.47 times less risky than Sea. It trades about 0.05 of its potential returns per unit of risk. Sea is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  9,915  in Sea on October 25, 2024 and sell it today you would earn a total of  1,921  from holding Sea or generate 19.37% return on investment over 90 days.

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

Lithia Motors  vs.  Sea

Lithia Motors

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Lithia Motors are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, Lithia Motors is not utilizing all of its potentials. The recent stock price tumult, may contribute to shorter-term losses for the shareholders.

Sea

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Sea are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady technical and fundamental indicators, Sea exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Lithia Motors and Sea

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

The idea behind Lithia Motors and Sea 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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.