Correlation Between Honda and Ford
Can any of the company-specific risk be diversified away by investing in both Honda and Ford 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 Honda and Ford into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Honda Motor Co and Ford Motor, you can compare the effects of market volatilities on Honda and Ford 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 Honda with a short position of Ford. Check out your portfolio center. Please also check ongoing floating volatility patterns of Honda and Ford.
Diversification Opportunities for Honda and Ford
Very poor diversification
The 3 months correlation between Honda and Ford is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Honda Motor Co and Ford Motor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ford Motor and Honda 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 Honda Motor Co are associated (or correlated) with Ford. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ford Motor has no effect on the direction of Honda i.e., Honda and Ford go up and down completely randomly.
Pair Corralation between Honda and Ford
Considering the 90-day investment horizon Honda Motor Co is expected to under-perform the Ford. But the stock apears to be less risky and, when comparing its historical volatility, Honda Motor Co is 2.43 times less risky than Ford. The stock trades about -0.37 of its potential returns per unit of risk. The Ford Motor is currently generating about -0.14 of returns per unit of risk over similar time horizon. If you would invest 1,290 in Ford Motor on January 20, 2024 and sell it today you would lose (84.00) from holding Ford Motor or give up 6.51% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 95.45% |
| Values | Daily Returns |
Honda Motor Co vs. Ford Motor
Performance |
| Timeline |
| Honda Motor |
| Ford Motor |
Honda and Ford Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Honda and Ford
The main advantage of trading using opposite Honda and Ford positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Honda position performs unexpectedly, Ford 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 Ford will offset losses from the drop in Ford's long position.The idea behind Honda Motor Co and Ford Motor 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 FinTech Suite module to use AI to screen and filter profitable investment opportunities.
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