Correlation Between Alphabet and Lithia Motors

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

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

Diversification Opportunities for Alphabet and Lithia Motors

0.67

Correlation Coefficient

Alphabet  Lithia Motors

Poor diversification

The 3 months correlation between Alphabet and Lithia is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding Alphabet Inc Class C and Lithia Motors in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lithia Motors and Alphabet 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 Alphabet Inc Class C 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 Alphabet i.e., Alphabet and Lithia Motors go up and down completely randomly.

Pair Corralation between Alphabet and Lithia Motors

Given the investment horizon of 90 days Alphabet Inc Class C is expected to generate 2.25 times more return on investment than Lithia Motors. However, Alphabet is 2.25 times more volatile than Lithia Motors. It trades about 0.31 of its potential returns per unit of risk. Lithia Motors is currently generating about -0.38 per unit of risk. If you would invest  16,924  in Alphabet Inc Class C on September 24, 2024 and sell it today you would earn a total of  2,372  from holding Alphabet Inc Class C or generate 14.02% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	95.24%
Values	Daily Returns

Alphabet Inc Class C  vs.  Lithia Motors

Alphabet Class C

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Alphabet Inc Class C are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak basic indicators, Alphabet reported solid returns over the last few months and may actually be approaching a breakup point.

Lithia Motors

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Lithia Motors are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Lithia Motors reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Alphabet and Lithia Motors

The main advantage of trading using opposite Alphabet and Lithia Motors positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Alphabet 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 Alphabet Inc Class C 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 Financial Widgets module to easily integrated Macroaxis content with over 30 different plug-and-play financial widgets.