Correlation Between Volkswagen and Toyota

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

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

Diversification Opportunities for Volkswagen and Toyota

0.52

Correlation Coefficient

Volkswagen  Toyota

Very weak diversification

The 3 months correlation between Volkswagen and Toyota is 0.52. Overlapping area represents the amount of risk that can be diversified away by holding Volkswagen AG VZO and Toyota Motor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Toyota Motor 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 VZO are associated (or correlated) with Toyota. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Toyota Motor has no effect on the direction of Volkswagen i.e., Volkswagen and Toyota go up and down completely randomly.

Pair Corralation between Volkswagen and Toyota

Assuming the 90 days horizon Volkswagen is expected to generate 1.36 times less return on investment than Toyota. In addition to that, Volkswagen is 1.52 times more volatile than Toyota Motor. It trades about 0.04 of its total potential returns per unit of risk. Toyota Motor is currently generating about 0.07 per unit of volatility. If you would invest  14,830  in Toyota Motor on January 25, 2024 and sell it today you would earn a total of  8,458  from holding Toyota Motor or generate 57.03% return on investment over 90 days.

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

Volkswagen AG VZO  vs.  Toyota Motor

Volkswagen AG VZO

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Volkswagen AG VZO are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak basic indicators, Volkswagen may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Toyota Motor

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Toyota Motor are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of very weak primary indicators, Toyota displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Volkswagen and Toyota

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

The idea behind Volkswagen AG VZO and Toyota Motor 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.