Correlation Between CarMax and Sonic Automotive

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

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

Diversification Opportunities for CarMax and Sonic Automotive

0.83

Correlation Coefficient

CarMax  Sonic Automotive

Very poor diversification

The 3 months correlation between CarMax and Sonic is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding CarMax Inc and Sonic Automotive in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sonic Automotive and CarMax 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 CarMax Inc are associated (or correlated) with Sonic Automotive. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sonic Automotive has no effect on the direction of CarMax i.e., CarMax and Sonic Automotive go up and down completely randomly.

Pair Corralation between CarMax and Sonic Automotive

Considering the 90-day investment horizon CarMax Inc is expected to generate 0.87 times more return on investment than Sonic Automotive. However, CarMax Inc is 1.15 times less risky than Sonic Automotive. It trades about 0.06 of its potential returns per unit of risk. Sonic Automotive is currently generating about 0.05 per unit of risk. If you would invest  6,504  in CarMax Inc on September 14, 2024 and sell it today you would earn a total of  2,122  from holding CarMax Inc or generate 32.63% return on investment over 90 days.

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

CarMax Inc  vs.  Sonic Automotive

CarMax Inc

Risk-Adjusted Performance

6 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in CarMax Inc are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of fairly unfluctuating primary indicators, CarMax may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Sonic Automotive

Risk-Adjusted Performance

10 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Sonic Automotive are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite fairly unsteady basic indicators, Sonic Automotive demonstrated solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with CarMax and Sonic Automotive

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

The idea behind CarMax Inc and Sonic Automotive 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.