Correlation Between Toyota and Volkswagen

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

By analyzing existing cross correlation between Toyota Motor and Volkswagen AG 110, you can compare the effects of market volatilities on Toyota and Volkswagen 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 Toyota with a short position of Volkswagen. Check out your portfolio center. Please also check ongoing floating volatility patterns of Toyota and Volkswagen.

Diversification Opportunities for Toyota and Volkswagen

0.4

Correlation Coefficient

Toyota  Volkswagen

Very weak diversification

The 3 months correlation between Toyota and Volkswagen is 0.4. Overlapping area represents the amount of risk that can be diversified away by holding Toyota Motor and Volkswagen AG 110 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Volkswagen AG 110 and Toyota 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 Toyota Motor are associated (or correlated) with Volkswagen. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Volkswagen AG 110 has no effect on the direction of Toyota i.e., Toyota and Volkswagen go up and down completely randomly.

Pair Corralation between Toyota and Volkswagen

Allowing for the 90-day total investment horizon Toyota Motor is expected to under-perform the Volkswagen. But the stock apears to be less risky and, when comparing its historical volatility, Toyota Motor is 1.15 times less risky than Volkswagen. The stock trades about -0.12 of its potential returns per unit of risk. The Volkswagen AG 110 is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  1,488  in Volkswagen AG 110 on February 21, 2024 and sell it today you would earn a total of  7.00  from holding Volkswagen AG 110 or generate 0.47% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	95.45%
Values	Daily Returns

Toyota Motor  vs.  Volkswagen AG 110

Toyota Motor

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Toyota Motor has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy primary indicators, Toyota is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Volkswagen AG 110

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Volkswagen AG 110 are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong technical and fundamental indicators, Volkswagen is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Toyota and Volkswagen

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

The idea behind Toyota Motor and Volkswagen AG 110 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.