Correlation Between Sumitomo Electric and LKQ

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

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

Diversification Opportunities for Sumitomo Electric and LKQ

-0.17

Correlation Coefficient

Sumitomo Electric  LKQ

Good diversification

The 3 months correlation between Sumitomo and LKQ is -0.17. Overlapping area represents the amount of risk that can be diversified away by holding Sumitomo Electric Industries and LKQ Corp. in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LKQ Corporation and Sumitomo Electric 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 Sumitomo Electric Industries are associated (or correlated) with LKQ. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of LKQ Corporation has no effect on the direction of Sumitomo Electric i.e., Sumitomo Electric and LKQ go up and down completely randomly.

Pair Corralation between Sumitomo Electric and LKQ

Assuming the 90 days horizon Sumitomo Electric is expected to generate 1.57 times less return on investment than LKQ. In addition to that, Sumitomo Electric is 2.04 times more volatile than LKQ Corporation. It trades about 0.04 of its total potential returns per unit of risk. LKQ Corporation is currently generating about 0.12 per unit of volatility. If you would invest  3,674  in LKQ Corporation on December 25, 2024 and sell it today you would earn a total of  375.50  from holding LKQ Corporation or generate 10.22% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.33%
Values	Daily Returns

Sumitomo Electric Industries  vs.  LKQ Corp.

Sumitomo Electric

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Sumitomo Electric Industries are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of fairly conflicting basic indicators, Sumitomo Electric may actually be approaching a critical reversion point that can send shares even higher in April 2025.

LKQ Corporation

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in LKQ Corporation are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak forward-looking signals, LKQ may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Sumitomo Electric and LKQ

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

The idea behind Sumitomo Electric Industries and LKQ Corporation 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.