Correlation Between Honda and Vale SA

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

Diversification Opportunities for Honda and Vale SA

0.63

Correlation Coefficient

Honda  Vale SA

Poor diversification

The 3 months correlation between Honda and Vale is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding Honda Motor Co and Vale SA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vale SA 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 Vale SA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vale SA has no effect on the direction of Honda i.e., Honda and Vale SA go up and down completely randomly.

Pair Corralation between Honda and Vale SA

Assuming the 90 days trading horizon Honda Motor Co is expected to generate 0.9 times more return on investment than Vale SA. However, Honda Motor Co is 1.11 times less risky than Vale SA. It trades about 0.01 of its potential returns per unit of risk. Vale SA is currently generating about -0.05 per unit of risk. If you would invest  15,345  in Honda Motor Co on September 17, 2024 and sell it today you would earn a total of  15.00  from holding Honda Motor Co or generate 0.1% return on investment over 90 days.

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

Honda Motor Co  vs.  Vale SA

Honda Motor

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Honda Motor Co has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Vale SA

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Vale SA has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Vale SA is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Honda and Vale SA

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

The idea behind Honda Motor Co and Vale SA 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.