Correlation Between Toyota and Cummins

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

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

Diversification Opportunities for Toyota and Cummins

0.75

Correlation Coefficient

Toyota  Cummins

Poor diversification

The 3 months correlation between Toyota and Cummins is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Toyota Motor and Cummins in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cummins 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 Cummins. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cummins has no effect on the direction of Toyota i.e., Toyota and Cummins go up and down completely randomly.

Pair Corralation between Toyota and Cummins

Assuming the 90 days trading horizon Toyota Motor is expected to generate 7.78 times more return on investment than Cummins. However, Toyota is 7.78 times more volatile than Cummins. It trades about 0.02 of its potential returns per unit of risk. Cummins is currently generating about -0.05 per unit of risk. If you would invest  6,960  in Toyota Motor on October 24, 2024 and sell it today you would earn a total of  39.00  from holding Toyota Motor or generate 0.56% return on investment over 90 days.

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

Toyota Motor  vs.  Cummins

Toyota Motor

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Toyota Motor are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak fundamental indicators, Toyota sustained solid returns over the last few months and may actually be approaching a breakup point.

Cummins

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Cummins are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak primary indicators, Cummins sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Toyota and Cummins

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

The idea behind Toyota Motor and Cummins 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 Competition Analyzer module to analyze and compare many basic indicators for a group of related or unrelated entities.