Correlation Between Toyota and ROYALTY

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

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

Diversification Opportunities for Toyota and ROYALTY

0.45

Correlation Coefficient

Toyota  ROYALTY

Very weak diversification

The 3 months correlation between Toyota and ROYALTY is 0.45. Overlapping area represents the amount of risk that can be diversified away by holding Toyota Motor and ROYALTY PHARMA PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ROYALTY PHARMA PLC 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 ROYALTY. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ROYALTY PHARMA PLC has no effect on the direction of Toyota i.e., Toyota and ROYALTY go up and down completely randomly.

Pair Corralation between Toyota and ROYALTY

Allowing for the 90-day total investment horizon Toyota Motor is expected to generate 2.2 times more return on investment than ROYALTY. However, Toyota is 2.2 times more volatile than ROYALTY PHARMA PLC. It trades about 0.05 of its potential returns per unit of risk. ROYALTY PHARMA PLC is currently generating about -0.12 per unit of risk. If you would invest  18,045  in Toyota Motor on December 23, 2024 and sell it today you would earn a total of  1,025  from holding Toyota Motor or generate 5.68% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.36%
Values	Daily Returns

Toyota Motor  vs.  ROYALTY PHARMA PLC

Toyota Motor

Risk-Adjusted Performance

Insignificant

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

ROYALTY PHARMA PLC

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Toyota and ROYALTY

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

The idea behind Toyota Motor and ROYALTY PHARMA PLC 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.