Correlation Between Penske Automotive and Lithia Motors

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

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

Diversification Opportunities for Penske Automotive and Lithia Motors

0.3

Correlation Coefficient

Penske Automotive  Lithia Motors

Weak diversification

The 3 months correlation between Penske and Lithia is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding Penske Automotive Group and Lithia Motors in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lithia Motors and Penske Automotive 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 Penske Automotive Group 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 Penske Automotive i.e., Penske Automotive and Lithia Motors go up and down completely randomly.

Pair Corralation between Penske Automotive and Lithia Motors

Considering the 90-day investment horizon Penske Automotive is expected to generate 1.76 times less return on investment than Lithia Motors. But when comparing it to its historical volatility, Penske Automotive Group is 1.37 times less risky than Lithia Motors. It trades about 0.05 of its potential returns per unit of risk. Lithia Motors is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  21,596  in Lithia Motors on August 30, 2024 and sell it today you would earn a total of  17,020  from holding Lithia Motors or generate 78.81% return on investment over 90 days.

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

Penske Automotive Group  vs.  Lithia Motors

Penske Automotive

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Penske Automotive Group has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Penske Automotive is not utilizing all of its potentials. The recent stock price disturbance, may contribute to mid-run losses for the stockholders.

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. 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.

Pair Trading with Penske Automotive and Lithia Motors

The main advantage of trading using opposite Penske Automotive and Lithia Motors positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Penske Automotive 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 Penske Automotive Group 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 Portfolio Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.