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 Corp, 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

0.82

Correlation Coefficient

Honda  Toyota

Very poor diversification

The 3 months correlation between Honda and Toyota is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding Honda Motor Co 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 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 Corp 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 generate 1.16 times more return on investment than Toyota. However, Honda is 1.16 times more volatile than Toyota Motor Corp. It trades about 0.06 of its potential returns per unit of risk. Toyota Motor Corp is currently generating about 0.03 per unit of risk. If you would invest  2,606  in Honda Motor Co on December 1, 2024 and sell it today you would earn a total of  173.00  from holding Honda Motor Co or generate 6.64% return on investment over 90 days.

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

Honda Motor Co  vs.  Toyota Motor Corp

Honda Motor

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Honda Motor Co are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of rather unfluctuating primary indicators, Honda may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Toyota Motor Corp

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Toyota Motor Corp are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Toyota is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

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 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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.