Correlation Between Lithia Motors and Sonic Automotive

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

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

Diversification Opportunities for Lithia Motors and Sonic Automotive

0.1

Correlation Coefficient

Lithia Motors  Sonic Automotive

Average diversification

The 3 months correlation between Lithia and Sonic is 0.1. Overlapping area represents the amount of risk that can be diversified away by holding Lithia Motors and Sonic Automotive in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sonic Automotive 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 Sonic Automotive. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sonic Automotive has no effect on the direction of Lithia Motors i.e., Lithia Motors and Sonic Automotive go up and down completely randomly.

Pair Corralation between Lithia Motors and Sonic Automotive

Considering the 90-day investment horizon Lithia Motors is expected to under-perform the Sonic Automotive. But the stock apears to be less risky and, when comparing its historical volatility, Lithia Motors is 1.23 times less risky than Sonic Automotive. The stock trades about 0.0 of its potential returns per unit of risk. The Sonic Automotive is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  5,175  in Sonic Automotive on February 2, 2024 and sell it today you would earn a total of  533.00  from holding Sonic Automotive or generate 10.3% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	99.19%
Values	Daily Returns

Lithia Motors  vs.  Sonic Automotive

Lithia Motors

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Lithia Motors has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's basic indicators remain rather sound which may send shares a bit higher in June 2024. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Sonic Automotive

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Sonic Automotive are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite fairly weak basic indicators, Sonic Automotive demonstrated solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Lithia Motors and Sonic Automotive

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

The idea behind Lithia Motors and Sonic Automotive 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.