Correlation Between Lithia Motors and Dolby Laboratories

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

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

Diversification Opportunities for Lithia Motors and Dolby Laboratories

0.66

Correlation Coefficient

Lithia Motors  Dolby Laboratories

Poor diversification

The 3 months correlation between Lithia and Dolby is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding Lithia Motors and Dolby Laboratories in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dolby Laboratories and Lithia Motors 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 Lithia Motors are associated (or correlated) with Dolby Laboratories. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dolby Laboratories has no effect on the direction of Lithia Motors i.e., Lithia Motors and Dolby Laboratories go up and down completely randomly.

Pair Corralation between Lithia Motors and Dolby Laboratories

Considering the 90-day investment horizon Lithia Motors is expected to generate 1.06 times more return on investment than Dolby Laboratories. However, Lithia Motors is 1.06 times more volatile than Dolby Laboratories. It trades about 0.2 of its potential returns per unit of risk. Dolby Laboratories is currently generating about 0.09 per unit of risk. If you would invest  28,995  in Lithia Motors on September 2, 2024 and sell it today you would earn a total of  9,695  from holding Lithia Motors or generate 33.44% return on investment over 90 days.

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

Lithia Motors  vs.  Dolby Laboratories

Lithia Motors

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Lithia Motors are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of rather inconsistent basic indicators, Lithia Motors exhibited solid returns over the last few months and may actually be approaching a breakup point.

Dolby Laboratories

Risk-Adjusted Performance

6 of 100

Modest

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

Pair Trading with Lithia Motors and Dolby Laboratories

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

The idea behind Lithia Motors and Dolby Laboratories 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.