Correlation Between KAR Auction and Carvana

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

By analyzing existing cross correlation between KAR Auction Services and Carvana Co, you can compare the effects of market volatilities on KAR Auction and Carvana 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 KAR Auction with a short position of Carvana. Check out your portfolio center. Please also check ongoing floating volatility patterns of KAR Auction and Carvana.

Diversification Opportunities for KAR Auction and Carvana

0.64

Correlation Coefficient

KAR Auction  Carvana

Poor diversification

The 3 months correlation between KAR and Carvana is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding KAR Auction Services and Carvana Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Carvana and KAR Auction 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 KAR Auction Services are associated (or correlated) with Carvana. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Carvana has no effect on the direction of KAR Auction i.e., KAR Auction and Carvana go up and down completely randomly.

Pair Corralation between KAR Auction and Carvana

Considering the 90-day investment horizon KAR Auction is expected to generate 3.44 times less return on investment than Carvana. But when comparing it to its historical volatility, KAR Auction Services is 1.56 times less risky than Carvana. It trades about 0.12 of its potential returns per unit of risk. Carvana Co is currently generating about 0.26 of returns per unit of risk over similar time horizon. If you would invest  15,062  in Carvana Co on August 30, 2024 and sell it today you would earn a total of  10,435  from holding Carvana Co or generate 69.28% return on investment over 90 days.

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

KAR Auction Services  vs.  Carvana Co

KAR Auction Services

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in KAR Auction Services are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Even with relatively fragile basic indicators, KAR Auction reported solid returns over the last few months and may actually be approaching a breakup point.

Carvana

Risk-Adjusted Performance

20 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Carvana Co are ranked lower than 20 (%) of all global equities and portfolios over the last 90 days. Despite somewhat uncertain basic indicators, Carvana sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with KAR Auction and Carvana

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

The idea behind KAR Auction Services and Carvana Co 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.