Correlation Between Nio and Li Auto

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

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

Diversification Opportunities for Nio and Li Auto

0.7

Correlation Coefficient

Nio  Li Auto

Poor diversification

The 3 months correlation between Nio and Li Auto is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Nio Class A and Li Auto in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Li Auto and Nio 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 Nio Class A are associated (or correlated) with Li Auto. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Li Auto has no effect on the direction of Nio i.e., Nio and Li Auto go up and down completely randomly.

Pair Corralation between Nio and Li Auto

Considering the 90-day investment horizon Nio Class A is expected to under-perform the Li Auto. In addition to that, Nio is 1.0 times more volatile than Li Auto. It trades about -0.12 of its total potential returns per unit of risk. Li Auto is currently generating about -0.08 per unit of volatility. If you would invest  2,526  in Li Auto on August 20, 2024 and sell it today you would lose (228.00) from holding Li Auto or give up 9.03% of portfolio value over 90 days.

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

Nio Class A  vs.  Li Auto

Nio Class A

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Nio Class A are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of very uncertain forward indicators, Nio displayed solid returns over the last few months and may actually be approaching a breakup point.

Li Auto

Risk-Adjusted Performance

5 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Li Auto are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite fairly abnormal forward indicators, Li Auto demonstrated solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Nio and Li Auto

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

The idea behind Nio Class A and Li Auto 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.