Correlation Between Toyota and Honda

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

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

Diversification Opportunities for Toyota and Honda

0.59

Correlation Coefficient

Toyota  Honda

Very weak diversification

The 3 months correlation between Toyota and Honda is 0.59. Overlapping area represents the amount of risk that can be diversified away by holding Toyota Motor and Honda Motor Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Honda Motor 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 Honda. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Honda Motor has no effect on the direction of Toyota i.e., Toyota and Honda go up and down completely randomly.

Pair Corralation between Toyota and Honda

Allowing for the 90-day total investment horizon Toyota Motor is expected to under-perform the Honda. In addition to that, Toyota is 1.01 times more volatile than Honda Motor Co. It trades about -0.06 of its total potential returns per unit of risk. Honda Motor Co is currently generating about 0.01 per unit of volatility. If you would invest  2,876  in Honda Motor Co on December 27, 2024 and sell it today you would earn a total of  2.00  from holding Honda Motor Co or generate 0.07% return on investment over 90 days.

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

Toyota Motor  vs.  Honda Motor Co

Toyota Motor

Risk-Adjusted Performance

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 latest weak performance, the Stock's primary indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

Honda Motor

Risk-Adjusted Performance

Insignificant

Over the last 90 days Honda Motor Co has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound primary indicators, Honda is not utilizing all of its potentials. The recent stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Toyota and Honda

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

The idea behind Toyota Motor and Honda Motor Co 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.