Correlation Between Volkswagen and Dollar Tree

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

By analyzing existing cross correlation between Volkswagen AG and Dollar Tree, you can compare the effects of market volatilities on Volkswagen and Dollar Tree 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 Volkswagen with a short position of Dollar Tree. Check out your portfolio center. Please also check ongoing floating volatility patterns of Volkswagen and Dollar Tree.

Diversification Opportunities for Volkswagen and Dollar Tree

-0.21

Correlation Coefficient

Volkswagen  Dollar Tree

Very good diversification

The 3 months correlation between Volkswagen and Dollar is -0.21. Overlapping area represents the amount of risk that can be diversified away by holding Volkswagen AG and Dollar Tree in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dollar Tree and Volkswagen 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 Volkswagen AG are associated (or correlated) with Dollar Tree. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dollar Tree has no effect on the direction of Volkswagen i.e., Volkswagen and Dollar Tree go up and down completely randomly.

Pair Corralation between Volkswagen and Dollar Tree

Assuming the 90 days trading horizon Volkswagen AG is expected to under-perform the Dollar Tree. But the stock apears to be less risky and, when comparing its historical volatility, Volkswagen AG is 1.55 times less risky than Dollar Tree. The stock trades about -0.06 of its potential returns per unit of risk. The Dollar Tree is currently generating about -0.04 of returns per unit of risk over similar time horizon. If you would invest  13,318  in Dollar Tree on October 5, 2024 and sell it today you would lose (5,898) from holding Dollar Tree or give up 44.29% of portfolio value over 90 days.

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

Volkswagen AG  vs.  Dollar Tree

Volkswagen AG

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Volkswagen AG has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest fragile performance, the Stock's basic indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Dollar Tree

Risk-Adjusted Performance

0 of 100

OK

Over the last 90 days Dollar Tree has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly fragile basic indicators, Dollar Tree reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Volkswagen and Dollar Tree

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

The idea behind Volkswagen AG and Dollar Tree 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.