Correlation Between Honda and Toyota

Can any of the company-specific risk be diversified away by investing in both Honda and Toyota 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 Toyota 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 Toyota Motor, you can compare the effects of market volatilities on Honda and Toyota 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 Toyota. Check out your portfolio center. Please also check ongoing floating volatility patterns of Honda and Toyota.

Diversification Opportunities for Honda and Toyota

0.57

Correlation Coefficient

Honda  Toyota

Very weak diversification

The 3 months correlation between Honda and Toyota is 0.57. Overlapping area represents the amount of risk that can be diversified away by holding Honda Motor Co and Toyota Motor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Toyota 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 Toyota. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Toyota Motor has no effect on the direction of Honda i.e., Honda and Toyota go up and down completely randomly.

Pair Corralation between Honda and Toyota

Considering the 90-day investment horizon Honda Motor Co is expected to under-perform the Toyota. In addition to that, Honda is 1.23 times more volatile than Toyota Motor. It trades about -0.2 of its total potential returns per unit of risk. Toyota Motor is currently generating about -0.11 per unit of volatility. If you would invest  18,980  in Toyota Motor on August 30, 2024 and sell it today you would lose (2,008) from holding Toyota Motor or give up 10.58% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.44%
Values	Daily Returns

Honda Motor Co  vs.  Toyota Motor

Honda Motor

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Honda Motor Co has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unfluctuating performance in the last few months, the Stock's primary indicators remain rather sound which may send shares a bit higher in December 2024. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

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 latest weak performance, the Stock's primary indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

Pair Trading with Honda and Toyota

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

The idea behind Honda Motor Co and Toyota 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.

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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 Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.