Correlation Between Toyota and McKesson

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

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

Diversification Opportunities for Toyota and McKesson

0.03

Correlation Coefficient

Toyota  McKesson

Significant diversification

The 3 months correlation between Toyota and McKesson is 0.03. Overlapping area represents the amount of risk that can be diversified away by holding Toyota Motor and McKesson in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on McKesson 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 McKesson. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of McKesson has no effect on the direction of Toyota i.e., Toyota and McKesson go up and down completely randomly.

Pair Corralation between Toyota and McKesson

Assuming the 90 days trading horizon Toyota Motor is expected to generate 1.6 times more return on investment than McKesson. However, Toyota is 1.6 times more volatile than McKesson. It trades about 0.09 of its potential returns per unit of risk. McKesson is currently generating about 0.09 per unit of risk. If you would invest  325,537  in Toyota Motor on October 11, 2024 and sell it today you would earn a total of  75,463  from holding Toyota Motor or generate 23.18% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	31.58%
Values	Daily Returns

Toyota Motor  vs.  McKesson

Toyota Motor

Risk-Adjusted Performance

0 of 100

Solid

Over the last 90 days Toyota Motor has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly weak basic indicators, Toyota showed solid returns over the last few months and may actually be approaching a breakup point.

McKesson

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in McKesson are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of fairly unfluctuating forward-looking signals, McKesson showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Toyota and McKesson

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

The idea behind Toyota Motor and McKesson 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.