Correlation Between Lithia Motors and Localiza Rent

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

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

Diversification Opportunities for Lithia Motors and Localiza Rent

0.55

Correlation Coefficient

Lithia Motors  Localiza Rent

Very weak diversification

The 3 months correlation between Lithia and Localiza is 0.55. Overlapping area represents the amount of risk that can be diversified away by holding Lithia Motors and Localiza Rent A in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Localiza Rent A 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 Localiza Rent. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Localiza Rent A has no effect on the direction of Lithia Motors i.e., Lithia Motors and Localiza Rent go up and down completely randomly.

Pair Corralation between Lithia Motors and Localiza Rent

Considering the 90-day investment horizon Lithia Motors is expected to under-perform the Localiza Rent. But the stock apears to be less risky and, when comparing its historical volatility, Lithia Motors is 1.47 times less risky than Localiza Rent. The stock trades about -0.25 of its potential returns per unit of risk. The Localiza Rent A is currently generating about -0.09 of returns per unit of risk over similar time horizon. If you would invest  1,060  in Localiza Rent A on January 30, 2024 and sell it today you would lose (71.00) from holding Localiza Rent A or give up 6.7% of portfolio value over 90 days.

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

Lithia Motors  vs.  Localiza Rent A

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 fragile performance in the last few months, the Stock's basic indicators remain rather sound which may send shares a bit higher in May 2024. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Localiza Rent A

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Localiza Rent A has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong technical and fundamental indicators, Localiza Rent is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Lithia Motors and Localiza Rent

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

The idea behind Lithia Motors and Localiza Rent A 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 Latest Portfolios module to quick portfolio dashboard that showcases your latest portfolios.