Correlation Between Toyota and Empire Metals

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

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

Diversification Opportunities for Toyota and Empire Metals

0.61

Correlation Coefficient

Toyota  Empire Metals

Poor diversification

The 3 months correlation between Toyota and Empire is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding Toyota Motor Corp and Empire Metals Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Empire Metals Limited 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 Corp are associated (or correlated) with Empire Metals. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Empire Metals Limited has no effect on the direction of Toyota i.e., Toyota and Empire Metals go up and down completely randomly.

Pair Corralation between Toyota and Empire Metals

Assuming the 90 days trading horizon Toyota Motor Corp is expected to generate 0.66 times more return on investment than Empire Metals. However, Toyota Motor Corp is 1.53 times less risky than Empire Metals. It trades about 0.1 of its potential returns per unit of risk. Empire Metals Limited is currently generating about 0.04 per unit of risk. If you would invest  260,250  in Toyota Motor Corp on October 24, 2024 and sell it today you would earn a total of  31,300  from holding Toyota Motor Corp or generate 12.03% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.39%
Values	Daily Returns

Toyota Motor Corp  vs.  Empire Metals Limited

Toyota Motor Corp

Risk-Adjusted Performance

7 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Toyota Motor Corp are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain technical and fundamental indicators, Toyota exhibited solid returns over the last few months and may actually be approaching a breakup point.

Empire Metals Limited

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Empire Metals Limited are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain technical and fundamental indicators, Empire Metals may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Toyota and Empire Metals

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

The idea behind Toyota Motor Corp and Empire Metals Limited 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.