Correlation Between Honda and Howmet Aerospace

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

Diversification Opportunities for Honda and Howmet Aerospace

-0.19

Correlation Coefficient

Honda  Howmet Aerospace

Good diversification

The 3 months correlation between Honda and Howmet is -0.19. Overlapping area represents the amount of risk that can be diversified away by holding Honda Motor Co and Howmet Aerospace in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Howmet Aerospace 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 Howmet Aerospace. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Howmet Aerospace has no effect on the direction of Honda i.e., Honda and Howmet Aerospace go up and down completely randomly.

Pair Corralation between Honda and Howmet Aerospace

Assuming the 90 days trading horizon Honda is expected to generate 2.66 times less return on investment than Howmet Aerospace. In addition to that, Honda is 1.23 times more volatile than Howmet Aerospace. It trades about 0.12 of its total potential returns per unit of risk. Howmet Aerospace is currently generating about 0.38 per unit of volatility. If you would invest  68,273  in Howmet Aerospace on October 23, 2024 and sell it today you would earn a total of  8,137  from holding Howmet Aerospace or generate 11.92% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	94.44%
Values	Daily Returns

Honda Motor Co  vs.  Howmet Aerospace

Honda Motor

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Honda Motor Co are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Honda is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Howmet Aerospace

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Howmet Aerospace are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Howmet Aerospace sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Honda and Howmet Aerospace

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

The idea behind Honda Motor Co and Howmet Aerospace 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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.