Correlation Between Volkswagen and Lumentum Holdings

Can any of the company-specific risk be diversified away by investing in both Volkswagen and Lumentum Holdings 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 Lumentum Holdings 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 Lumentum Holdings, you can compare the effects of market volatilities on Volkswagen and Lumentum Holdings 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 Lumentum Holdings. Check out your portfolio center. Please also check ongoing floating volatility patterns of Volkswagen and Lumentum Holdings.

Diversification Opportunities for Volkswagen and Lumentum Holdings

-0.81

Correlation Coefficient

Volkswagen  Lumentum Holdings

Pay attention - limited upside

The 3 months correlation between Volkswagen and Lumentum is -0.81. Overlapping area represents the amount of risk that can be diversified away by holding Volkswagen AG VZO and Lumentum Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lumentum Holdings 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 Lumentum Holdings. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lumentum Holdings has no effect on the direction of Volkswagen i.e., Volkswagen and Lumentum Holdings go up and down completely randomly.

Pair Corralation between Volkswagen and Lumentum Holdings

Assuming the 90 days horizon Volkswagen AG VZO is expected to under-perform the Lumentum Holdings. But the pink sheet apears to be less risky and, when comparing its historical volatility, Volkswagen AG VZO is 1.25 times less risky than Lumentum Holdings. The pink sheet trades about -0.01 of its potential returns per unit of risk. The Lumentum Holdings is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  5,272  in Lumentum Holdings on August 27, 2024 and sell it today you would earn a total of  3,637  from holding Lumentum Holdings or generate 68.99% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Significant
Accuracy	99.19%
Values	Daily Returns

Volkswagen AG VZO  vs.  Lumentum Holdings

Volkswagen AG VZO

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Volkswagen AG VZO has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in December 2024. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Lumentum Holdings

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Lumentum Holdings are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak basic indicators, Lumentum Holdings exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Volkswagen and Lumentum Holdings

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

The idea behind Volkswagen AG VZO and Lumentum Holdings 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.