Can any of the company-specific risk be diversified away by investing in both CarMax and ZEGA Buy 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 CarMax and ZEGA Buy into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between CarMax Inc and ZEGA Buy And, you can compare the effects of market volatilities on CarMax and ZEGA Buy 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 CarMax with a short position of ZEGA Buy. Check out your portfolio center. Please also check ongoing floating volatility patterns of CarMax and ZEGA Buy.
Diversification Opportunities for CarMax and ZEGA Buy
The 3 months correlation between CarMax and ZEGA is 0.58. Overlapping area represents the amount of risk that can be diversified away by holding CarMax Inc and ZEGA Buy And in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ZEGA Buy And and CarMax 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 CarMax Inc are associated (or correlated) with ZEGA Buy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ZEGA Buy And has no effect on the direction of CarMax i.e., CarMax and ZEGA Buy go up and down completely randomly.
Considering the 90-day investment horizon CarMax Inc is expected to under-perform the ZEGA Buy. In addition to that, CarMax is 6.15 times more volatile than ZEGA Buy And. It trades about -0.18 of its total potential returns per unit of risk. ZEGA Buy And is currently generating about -0.4 per unit of volatility. If you would invest 1,780 in ZEGA Buy And on July 2, 2023 and sell it today you would lose (81.00) from holding ZEGA Buy And or give up 4.55% of portfolio value over 90 days.
Over the last 90 days CarMax Inc has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unfluctuating performance in the last few months, the Stock's primary indicators remain fairly strong which may send shares a bit higher in October 2023. The current disturbance may also be a sign of long term up-swing for the company investors.
Over the last 90 days ZEGA Buy And has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable fundamental indicators, ZEGA Buy is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.
The main advantage of trading using opposite CarMax and ZEGA Buy positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if CarMax position performs unexpectedly, ZEGA Buy 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 ZEGA Buy will offset losses from the drop in ZEGA Buy's long position.
The idea behind CarMax Inc and ZEGA Buy And 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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.
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