Correlation Between Mercedes Benz and Volkswagen

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

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

Diversification Opportunities for Mercedes Benz and Volkswagen

0.48

Correlation Coefficient

Mercedes Benz  Volkswagen

Very weak diversification

The 3 months correlation between Mercedes and Volkswagen is 0.48. Overlapping area represents the amount of risk that can be diversified away by holding Mercedes Benz Group AG and Volkswagen AG VZO in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Volkswagen AG VZO and Mercedes Benz 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 Mercedes Benz Group AG are associated (or correlated) with Volkswagen. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Volkswagen AG VZO has no effect on the direction of Mercedes Benz i.e., Mercedes Benz and Volkswagen go up and down completely randomly.

Pair Corralation between Mercedes Benz and Volkswagen

Assuming the 90 days horizon Mercedes Benz Group AG is expected to generate 0.86 times more return on investment than Volkswagen. However, Mercedes Benz Group AG is 1.17 times less risky than Volkswagen. It trades about 0.02 of its potential returns per unit of risk. Volkswagen AG VZO is currently generating about -0.08 per unit of risk. If you would invest  7,938  in Mercedes Benz Group AG on January 31, 2024 and sell it today you would earn a total of  27.00  from holding Mercedes Benz Group AG or generate 0.34% return on investment over 90 days.

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

Mercedes Benz Group AG  vs.  Volkswagen AG VZO

Mercedes Benz Group

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Mercedes Benz Group AG are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak basic indicators, Mercedes Benz reported solid returns over the last few months and may actually be approaching a breakup point.

Volkswagen AG VZO

Risk-Adjusted Performance

0 of 100

Weak

Over the last 90 days Volkswagen AG VZO has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Volkswagen is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Mercedes Benz and Volkswagen

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

The idea behind Mercedes Benz Group AG and Volkswagen AG VZO 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.