Correlation Between Smiths Group and Auto Trader

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

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

Diversification Opportunities for Smiths Group and Auto Trader

0.25

Correlation Coefficient

Smiths Group  Auto Trader

Modest diversification

The 3 months correlation between Smiths and Auto is 0.25. Overlapping area represents the amount of risk that can be diversified away by holding Smiths Group Plc and Auto Trader Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Auto Trader Group and Smiths Group 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 Smiths Group Plc are associated (or correlated) with Auto Trader. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Auto Trader Group has no effect on the direction of Smiths Group i.e., Smiths Group and Auto Trader go up and down completely randomly.

Pair Corralation between Smiths Group and Auto Trader

Assuming the 90 days horizon Smiths Group Plc is expected to generate 1.51 times more return on investment than Auto Trader. However, Smiths Group is 1.51 times more volatile than Auto Trader Group. It trades about 0.15 of its potential returns per unit of risk. Auto Trader Group is currently generating about -0.03 per unit of risk. If you would invest  2,160  in Smiths Group Plc on December 29, 2024 and sell it today you would earn a total of  398.00  from holding Smiths Group Plc or generate 18.43% return on investment over 90 days.

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

Smiths Group Plc  vs.  Auto Trader Group

Smiths Group Plc

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Smiths Group Plc are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Smiths Group showed solid returns over the last few months and may actually be approaching a breakup point.

Auto Trader Group

Risk-Adjusted Performance

Very Weak

Over the last 90 days Auto Trader Group has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Auto Trader is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Smiths Group and Auto Trader

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

The idea behind Smiths Group Plc and Auto Trader Group 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 Stock Tickers module to use high-impact, comprehensive, and customizable stock tickers that can be easily integrated to any websites.