Correlation Between DR Horton and General Motors

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

By analyzing existing cross correlation between DR Horton and General Motors, you can compare the effects of market volatilities on DR Horton and General 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 DR Horton with a short position of General Motors. Check out your portfolio center. Please also check ongoing floating volatility patterns of DR Horton and General Motors.

Diversification Opportunities for DR Horton and General Motors

-0.75

Correlation Coefficient

DR Horton  General Motors

Pay attention - limited upside

The 3 months correlation between D1HI34 and General is -0.75. Overlapping area represents the amount of risk that can be diversified away by holding DR Horton and General Motors in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on General Motors and DR Horton 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 DR Horton are associated (or correlated) with General Motors. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of General Motors has no effect on the direction of DR Horton i.e., DR Horton and General Motors go up and down completely randomly.

Pair Corralation between DR Horton and General Motors

Assuming the 90 days trading horizon DR Horton is expected to under-perform the General Motors. But the stock apears to be less risky and, when comparing its historical volatility, DR Horton is 1.47 times less risky than General Motors. The stock trades about -0.06 of its potential returns per unit of risk. The General Motors is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  6,477  in General Motors on September 12, 2024 and sell it today you would earn a total of  1,642  from holding General Motors or generate 25.35% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	98.39%
Values	Daily Returns

DR Horton  vs.  General Motors

DR Horton

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days DR Horton has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's technical indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

General Motors

Risk-Adjusted Performance

10 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in General Motors are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite somewhat uncertain fundamental indicators, General Motors sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with DR Horton and General Motors

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

The idea behind DR Horton and General Motors 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.