Correlation Between GM and Te Chang

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

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

Diversification Opportunities for GM and Te Chang

0.86

Correlation Coefficient

GM  Te Chang

Very poor diversification

The 3 months correlation between GM and 5511 is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Te Chang Construction in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Te Chang Construction and GM 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 General Motors are associated (or correlated) with Te Chang. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Te Chang Construction has no effect on the direction of GM i.e., GM and Te Chang go up and down completely randomly.

Pair Corralation between GM and Te Chang

Allowing for the 90-day total investment horizon General Motors is expected to generate 1.28 times more return on investment than Te Chang. However, GM is 1.28 times more volatile than Te Chang Construction. It trades about 0.08 of its potential returns per unit of risk. Te Chang Construction is currently generating about -0.01 per unit of risk. If you would invest  3,275  in General Motors on September 12, 2024 and sell it today you would earn a total of  1,999  from holding General Motors or generate 61.04% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	97.89%
Values	Daily Returns

General Motors  vs.  Te Chang Construction

General Motors

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in General Motors are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating primary indicators, GM displayed solid returns over the last few months and may actually be approaching a breakup point.

Te Chang Construction

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Te Chang Construction are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, Te Chang may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with GM and Te Chang

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

The idea behind General Motors and Te Chang Construction 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.