Correlation Between Toyota and Eastman Chemical

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

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

Diversification Opportunities for Toyota and Eastman Chemical

0.5

Correlation Coefficient

Toyota  Eastman Chemical

Very weak diversification

The 3 months correlation between Toyota and Eastman is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding Toyota Motor and Eastman Chemical in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Eastman Chemical 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 Eastman Chemical. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Eastman Chemical has no effect on the direction of Toyota i.e., Toyota and Eastman Chemical go up and down completely randomly.

Pair Corralation between Toyota and Eastman Chemical

Assuming the 90 days trading horizon Toyota Motor is expected to generate 23.65 times more return on investment than Eastman Chemical. However, Toyota is 23.65 times more volatile than Eastman Chemical. It trades about 0.21 of its potential returns per unit of risk. Eastman Chemical is currently generating about 0.16 per unit of risk. If you would invest  6,345  in Toyota Motor on October 8, 2024 and sell it today you would earn a total of  1,258  from holding Toyota Motor or generate 19.83% 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.  Eastman Chemical

Toyota Motor

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Toyota Motor are ranked lower than 13 (%) 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.

Eastman Chemical

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Eastman Chemical are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong primary indicators, Eastman Chemical is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Toyota and Eastman Chemical

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

The idea behind Toyota Motor and Eastman Chemical 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .