Correlation Between RH and Lithia Motors

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Can any of the company-specific risk be diversified away by investing in both RH 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 RH and Lithia Motors into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between RH and Lithia Motors, you can compare the effects of market volatilities on RH 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 RH with a short position of Lithia Motors. Check out your portfolio center. Please also check ongoing floating volatility patterns of RH and Lithia Motors.

Diversification Opportunities for RH and Lithia Motors

0.48
  Correlation Coefficient

Very weak diversification

The 3 months correlation between RH and Lithia is 0.48. Overlapping area represents the amount of risk that can be diversified away by holding RH and Lithia Motors in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lithia Motors and RH 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 RH 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 RH i.e., RH and Lithia Motors go up and down completely randomly.

Pair Corralation between RH and Lithia Motors

Allowing for the 90-day total investment horizon RH is expected to generate 3.76 times more return on investment than Lithia Motors. However, RH is 3.76 times more volatile than Lithia Motors. It trades about 0.04 of its potential returns per unit of risk. Lithia Motors is currently generating about -0.34 per unit of risk. If you would invest  39,678  in RH on October 10, 2024 and sell it today you would earn a total of  704.00  from holding RH or generate 1.77% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthWeak
Accuracy100.0%
ValuesDaily Returns

RH  vs.  Lithia Motors

 Performance 
       Timeline  
RH 

Risk-Adjusted Performance

10 of 100

 
Weak
 
Strong
OK
Compared to the overall equity markets, risk-adjusted returns on investments in RH are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite fairly uncertain technical indicators, RH demonstrated solid returns over the last few months and may actually be approaching a breakup point.
Lithia Motors 

Risk-Adjusted Performance

8 of 100

 
Weak
 
Strong
OK
Compared to the overall equity markets, risk-adjusted returns on investments in Lithia Motors are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of rather inconsistent basic indicators, Lithia Motors exhibited solid returns over the last few months and may actually be approaching a breakup point.

RH and Lithia Motors Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with RH and Lithia Motors

The main advantage of trading using opposite RH and Lithia Motors positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if RH 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 RH 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.
Check out your portfolio center.
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 Cryptocurrency Center module to build and monitor diversified portfolio of extremely risky digital assets and cryptocurrency.

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