Correlation Between Toyota and Dongfeng

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

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

Diversification Opportunities for Toyota and Dongfeng

-0.23

Correlation Coefficient

Toyota  Dongfeng

Very good diversification

The 3 months correlation between Toyota and Dongfeng is -0.23. Overlapping area represents the amount of risk that can be diversified away by holding Toyota Motor and Dongfeng Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dongfeng Group and Toyota 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 Toyota Motor are associated (or correlated) with Dongfeng. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dongfeng Group has no effect on the direction of Toyota i.e., Toyota and Dongfeng go up and down completely randomly.

Pair Corralation between Toyota and Dongfeng

Allowing for the 90-day total investment horizon Toyota is expected to generate 1.36 times less return on investment than Dongfeng. But when comparing it to its historical volatility, Toyota Motor is 3.18 times less risky than Dongfeng. It trades about 0.05 of its potential returns per unit of risk. Dongfeng Group is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  59.00  in Dongfeng Group on September 24, 2024 and sell it today you would lose (4.00) from holding Dongfeng Group or give up 6.78% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	99.8%
Values	Daily Returns

Toyota Motor  vs.  Dongfeng Group

Toyota Motor

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Toyota Motor has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy primary indicators, Toyota is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Dongfeng Group

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Dongfeng Group are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. Despite nearly unfluctuating technical and fundamental indicators, Dongfeng reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Toyota and Dongfeng

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

The idea behind Toyota Motor and Dongfeng Group 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.