Can any of the company-specific risk be diversified away by investing in both AutoNation and Capri Holdings 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 AutoNation and Capri Holdings into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between AutoNation and Capri Holdings, you can compare the effects of market volatilities on AutoNation and Capri Holdings 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 AutoNation with a short position of Capri Holdings. Check out your portfolio center. Please also check ongoing floating volatility patterns of AutoNation and Capri Holdings.
Diversification Opportunities for AutoNation and Capri Holdings
The 3 months correlation between AutoNation and Capri is -0.6. Overlapping area represents the amount of risk that can be diversified away by holding AutoNation and Capri Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Capri Holdings and AutoNation 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 AutoNation are associated (or correlated) with Capri Holdings. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Capri Holdings has no effect on the direction of AutoNation i.e., AutoNation and Capri Holdings go up and down completely randomly.
Pair Corralation between AutoNation and Capri Holdings
Allowing for the 90-day total investment horizon AutoNation is expected to generate 1.26 times more return on investment than Capri Holdings. However, AutoNation is 1.26 times more volatile than Capri Holdings. It trades about 0.08 of its potential returns per unit of risk. Capri Holdings is currently generating about -0.15 per unit of risk. If you would invest 16,644 in AutoNation on March 6, 2024 and sell it today you would earn a total of 384.00 from holding AutoNation or generate 2.31% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in AutoNation are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of very inconsistent basic indicators, AutoNation displayed solid returns over the last few months and may actually be approaching a breakup point.
Over the last 90 days Capri Holdings has generated negative risk-adjusted returns adding no value to investors with long positions. Despite conflicting performance in the last few months, the Stock's basic indicators remain fairly strong which may send shares a bit higher in July 2024. The recent confusion may also be a sign of long-lasting up-swing for the firm traders.