Correlation Between Deere and Volkswagen

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

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

Diversification Opportunities for Deere and Volkswagen

0.6

Correlation Coefficient

Deere  Volkswagen

Poor diversification

The 3 months correlation between Deere and Volkswagen is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding Deere Company and Volkswagen AG VZO in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Volkswagen AG VZO and Deere 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 Deere Company 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 VZO has no effect on the direction of Deere i.e., Deere and Volkswagen go up and down completely randomly.

Pair Corralation between Deere and Volkswagen

Allowing for the 90-day total investment horizon Deere is expected to generate 1.61 times less return on investment than Volkswagen. But when comparing it to its historical volatility, Deere Company is 1.98 times less risky than Volkswagen. It trades about 0.09 of its potential returns per unit of risk. Volkswagen AG VZO is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  9,244  in Volkswagen AG VZO on December 29, 2024 and sell it today you would earn a total of  1,262  from holding Volkswagen AG VZO or generate 13.65% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.36%
Values	Daily Returns

Deere Company  vs.  Volkswagen AG VZO

Deere Company

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Deere Company are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of rather unfluctuating technical and fundamental indicators, Deere may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Volkswagen AG VZO

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Volkswagen AG VZO are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak basic indicators, Volkswagen reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Deere and Volkswagen

The main advantage of trading using opposite Deere and Volkswagen positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Deere 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 Deere Company and Volkswagen AG VZO 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 Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.