Correlation Between Localiza Rent and Lithia Motors

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

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

Diversification Opportunities for Localiza Rent and Lithia Motors

0.55

Correlation Coefficient

Localiza Rent  Lithia Motors

Very weak diversification

The 3 months correlation between Localiza and Lithia is 0.55. Overlapping area represents the amount of risk that can be diversified away by holding Localiza Rent A and Lithia Motors in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lithia Motors and Localiza Rent 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 Localiza Rent A 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 Localiza Rent i.e., Localiza Rent and Lithia Motors go up and down completely randomly.

Pair Corralation between Localiza Rent and Lithia Motors

Assuming the 90 days horizon Localiza Rent A is expected to generate 1.47 times more return on investment than Lithia Motors. However, Localiza Rent is 1.47 times more volatile than Lithia Motors. It trades about -0.09 of its potential returns per unit of risk. Lithia Motors is currently generating about -0.25 per unit of risk. 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

Localiza Rent A  vs.  Lithia Motors

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.

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.

Pair Trading with Localiza Rent and Lithia Motors

The main advantage of trading using opposite Localiza Rent and Lithia Motors positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Localiza Rent 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 Localiza Rent A 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.