Correlation Between Honda and Arista Networks

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

Diversification Opportunities for Honda and Arista Networks

-0.49

Correlation Coefficient

Honda  Arista Networks

Very good diversification

The 3 months correlation between Honda and Arista is -0.49. Overlapping area represents the amount of risk that can be diversified away by holding Honda Motor Co and Arista Networks in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Arista Networks 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 Arista Networks. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Arista Networks has no effect on the direction of Honda i.e., Honda and Arista Networks go up and down completely randomly.

Pair Corralation between Honda and Arista Networks

Assuming the 90 days trading horizon Honda Motor Co is expected to under-perform the Arista Networks. But the stock apears to be less risky and, when comparing its historical volatility, Honda Motor Co is 1.77 times less risky than Arista Networks. The stock trades about -0.16 of its potential returns per unit of risk. The Arista Networks is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  50,074  in Arista Networks on August 30, 2024 and sell it today you would earn a total of  10,611  from holding Arista Networks or generate 21.19% return on investment over 90 days.

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

Honda Motor Co  vs.  Arista Networks

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. Despite weak performance in the last few months, the Stock's basic indicators remain somewhat strong which may send shares a bit higher in December 2024. The current disturbance may also be a sign of long term up-swing for the company investors.

Arista Networks

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Arista Networks are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat uncertain basic indicators, Arista Networks sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Honda and Arista Networks

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

The idea behind Honda Motor Co and Arista Networks 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 Anywhere module to track or share privately all of your investments from the convenience of any device.