Correlation Between Volkswagen and Tata Motors

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

By analyzing existing cross correlation between Volkswagen AG 110 and Tata Motors Limited, you can compare the effects of market volatilities on Volkswagen and Tata Motors 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 Tata Motors. Check out your portfolio center. Please also check ongoing floating volatility patterns of Volkswagen and Tata Motors.

Diversification Opportunities for Volkswagen and Tata Motors

-0.33

Correlation Coefficient

Volkswagen  Tata Motors

Very good diversification

The 3 months correlation between Volkswagen and Tata is -0.33. Overlapping area represents the amount of risk that can be diversified away by holding Volkswagen AG 110 and Tata Motors Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tata Motors Limited 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 110 are associated (or correlated) with Tata Motors. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tata Motors Limited has no effect on the direction of Volkswagen i.e., Volkswagen and Tata Motors go up and down completely randomly.

Pair Corralation between Volkswagen and Tata Motors

Assuming the 90 days horizon Volkswagen is expected to generate 1.47 times less return on investment than Tata Motors. But when comparing it to its historical volatility, Volkswagen AG 110 is 1.03 times less risky than Tata Motors. It trades about 0.02 of its potential returns per unit of risk. Tata Motors Limited is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  2,475  in Tata Motors Limited on January 19, 2024 and sell it today you would earn a total of  39.00  from holding Tata Motors Limited or generate 1.58% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	18.38%
Values	Daily Returns

Volkswagen AG 110  vs.  Tata Motors Limited

Volkswagen AG 110

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Volkswagen AG 110 are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile technical and fundamental indicators, Volkswagen showed solid returns over the last few months and may actually be approaching a breakup point.

Tata Motors Limited

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Tata Motors Limited has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Tata Motors is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Volkswagen and Tata Motors

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

The idea behind Volkswagen AG 110 and Tata Motors 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.

Check out your portfolio center.

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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.