Correlation Between UNITED UTILITIES and Lithia Motors

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

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

Diversification Opportunities for UNITED UTILITIES and Lithia Motors

0.65

Correlation Coefficient

UNITED UTILITIES  Lithia Motors

Poor diversification

The 3 months correlation between UNITED and Lithia is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding UNITED UTILITIES GR and Lithia Motors in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lithia Motors and UNITED UTILITIES 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 UNITED UTILITIES GR 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 UNITED UTILITIES i.e., UNITED UTILITIES and Lithia Motors go up and down completely randomly.

Pair Corralation between UNITED UTILITIES and Lithia Motors

Assuming the 90 days trading horizon UNITED UTILITIES is expected to generate 1.78 times less return on investment than Lithia Motors. But when comparing it to its historical volatility, UNITED UTILITIES GR is 1.39 times less risky than Lithia Motors. It trades about 0.05 of its potential returns per unit of risk. Lithia Motors is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  33,149  in Lithia Motors on October 7, 2024 and sell it today you would earn a total of  1,251  from holding Lithia Motors or generate 3.77% return on investment over 90 days.

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

UNITED UTILITIES GR  vs.  Lithia Motors

UNITED UTILITIES

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in UNITED UTILITIES GR are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable basic indicators, UNITED UTILITIES is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

Lithia Motors

Risk-Adjusted Performance

0 of 100

Good

Over the last 90 days Lithia Motors has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly weak basic indicators, Lithia Motors reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with UNITED UTILITIES and Lithia Motors

The main advantage of trading using opposite UNITED UTILITIES and Lithia Motors positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if UNITED UTILITIES 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 UNITED UTILITIES GR 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.

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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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.