Correlation Between Caledonia Investments and Toyota

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

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

Diversification Opportunities for Caledonia Investments and Toyota

0.74

Correlation Coefficient

Caledonia Investments  Toyota

Poor diversification

The 3 months correlation between Caledonia and Toyota is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding Caledonia Investments and Toyota Motor Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Toyota Motor Corp and Caledonia Investments 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 Caledonia Investments 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 Corp has no effect on the direction of Caledonia Investments i.e., Caledonia Investments and Toyota go up and down completely randomly.

Pair Corralation between Caledonia Investments and Toyota

Assuming the 90 days trading horizon Caledonia Investments is expected to generate 1.86 times less return on investment than Toyota. But when comparing it to its historical volatility, Caledonia Investments is 2.06 times less risky than Toyota. It trades about 0.15 of its potential returns per unit of risk. Toyota Motor Corp is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  254,500  in Toyota Motor Corp on October 23, 2024 and sell it today you would earn a total of  42,500  from holding Toyota Motor Corp or generate 16.7% return on investment over 90 days.

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

Caledonia Investments  vs.  Toyota Motor Corp

Caledonia Investments

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Caledonia Investments are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Caledonia Investments may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Toyota Motor Corp

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Toyota Motor Corp are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain technical and fundamental indicators, Toyota exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Caledonia Investments and Toyota

The main advantage of trading using opposite Caledonia Investments and Toyota positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Caledonia Investments 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 Caledonia Investments and Toyota Motor Corp 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.