Correlation Between AutoNation and Ulta Beauty

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

By analyzing existing cross correlation between AutoNation and Ulta Beauty, you can compare the effects of market volatilities on AutoNation and Ulta Beauty 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 Ulta Beauty. Check out your portfolio center. Please also check ongoing floating volatility patterns of AutoNation and Ulta Beauty.

Diversification Opportunities for AutoNation and Ulta Beauty

0.43

Correlation Coefficient

AutoNation  Ulta Beauty

Very weak diversification

The 3 months correlation between AutoNation and Ulta is 0.43. Overlapping area represents the amount of risk that can be diversified away by holding AutoNation and Ulta Beauty in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ulta Beauty 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 Ulta Beauty. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ulta Beauty has no effect on the direction of AutoNation i.e., AutoNation and Ulta Beauty go up and down completely randomly.

Pair Corralation between AutoNation and Ulta Beauty

Allowing for the 90-day total investment horizon AutoNation is expected to under-perform the Ulta Beauty. But the stock apears to be less risky and, when comparing its historical volatility, AutoNation is 1.37 times less risky than Ulta Beauty. The stock trades about -0.02 of its potential returns per unit of risk. The Ulta Beauty is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  40,226  in Ulta Beauty on September 25, 2024 and sell it today you would earn a total of  2,688  from holding Ulta Beauty or generate 6.68% return on investment over 90 days.

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

AutoNation  vs.  Ulta Beauty

AutoNation

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days AutoNation has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, AutoNation is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Ulta Beauty

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Ulta Beauty are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite somewhat unfluctuating basic indicators, Ulta Beauty may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with AutoNation and Ulta Beauty

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

The idea behind AutoNation and Ulta Beauty 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.