Correlation Between Volkswagen and Meliá Hotels

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

By analyzing existing cross correlation between Volkswagen AG and Meli Hotels International, you can compare the effects of market volatilities on Volkswagen and Meliá Hotels 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 Meliá Hotels. Check out your portfolio center. Please also check ongoing floating volatility patterns of Volkswagen and Meliá Hotels.

Diversification Opportunities for Volkswagen and Meliá Hotels

-0.33

Correlation Coefficient

Volkswagen  Meliá Hotels

Very good diversification

The 3 months correlation between Volkswagen and Meliá is -0.33. Overlapping area represents the amount of risk that can be diversified away by holding Volkswagen AG and Meli Hotels International in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Meli Hotels International 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 Meliá Hotels. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Meli Hotels International has no effect on the direction of Volkswagen i.e., Volkswagen and Meliá Hotels go up and down completely randomly.

Pair Corralation between Volkswagen and Meliá Hotels

Assuming the 90 days trading horizon Volkswagen AG is expected to generate 1.14 times more return on investment than Meliá Hotels. However, Volkswagen is 1.14 times more volatile than Meli Hotels International. It trades about 0.13 of its potential returns per unit of risk. Meli Hotels International is currently generating about -0.08 per unit of risk. If you would invest  9,150  in Volkswagen AG on December 24, 2024 and sell it today you would earn a total of  1,320  from holding Volkswagen AG or generate 14.43% return on investment over 90 days.

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

Volkswagen AG  vs.  Meli Hotels International

Volkswagen AG

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Volkswagen AG are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile basic indicators, Volkswagen exhibited solid returns over the last few months and may actually be approaching a breakup point.

Meli Hotels International

Risk-Adjusted Performance

Very Weak

Over the last 90 days Meli Hotels International has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Pair Trading with Volkswagen and Meliá Hotels

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

The idea behind Volkswagen AG and Meli Hotels International 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.