Correlation Between Toyota and General Motors

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

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

Diversification Opportunities for Toyota and General Motors

0.24

Correlation Coefficient

Toyota  General Motors

Modest diversification

The 3 months correlation between Toyota and General is 0.24. Overlapping area represents the amount of risk that can be diversified away by holding Toyota Motor and General Motors in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on General Motors 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 General Motors. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of General Motors has no effect on the direction of Toyota i.e., Toyota and General Motors go up and down completely randomly.

Pair Corralation between Toyota and General Motors

Assuming the 90 days trading horizon Toyota Motor is expected to under-perform the General Motors. But the stock apears to be less risky and, when comparing its historical volatility, Toyota Motor is 1.72 times less risky than General Motors. The stock trades about -0.01 of its potential returns per unit of risk. The General Motors is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  6,835  in General Motors on September 3, 2024 and sell it today you would earn a total of  1,529  from holding General Motors or generate 22.37% return on investment over 90 days.

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

Toyota Motor  vs.  General Motors

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. Despite somewhat strong fundamental indicators, Toyota is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

General Motors

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in General Motors are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak fundamental indicators, General Motors sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Toyota and General Motors

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

The idea behind Toyota Motor and General 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 Bonds Directory module to find actively traded corporate debentures issued by US companies.