Correlation Between GM and African Rainbow

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

By analyzing existing cross correlation between General Motors and African Rainbow Capital, you can compare the effects of market volatilities on GM and African Rainbow 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 African Rainbow. Check out your portfolio center. Please also check ongoing floating volatility patterns of GM and African Rainbow.

Diversification Opportunities for GM and African Rainbow

0.64

Correlation Coefficient

GM  African Rainbow

Poor diversification

The 3 months correlation between GM and African is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and African Rainbow Capital in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on African Rainbow Capital 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 African Rainbow. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of African Rainbow Capital has no effect on the direction of GM i.e., GM and African Rainbow go up and down completely randomly.

Pair Corralation between GM and African Rainbow

Allowing for the 90-day total investment horizon GM is expected to generate 1.55 times less return on investment than African Rainbow. In addition to that, GM is 1.02 times more volatile than African Rainbow Capital. It trades about 0.08 of its total potential returns per unit of risk. African Rainbow Capital is currently generating about 0.13 per unit of volatility. If you would invest  56,500  in African Rainbow Capital on September 1, 2024 and sell it today you would earn a total of  22,500  from holding African Rainbow Capital or generate 39.82% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.44%
Values	Daily Returns

General Motors  vs.  African Rainbow Capital

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 weak primary indicators, GM displayed solid returns over the last few months and may actually be approaching a breakup point.

African Rainbow Capital

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in African Rainbow Capital are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady technical and fundamental indicators, African Rainbow exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with GM and African Rainbow

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

The idea behind General Motors and African Rainbow Capital 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 Global Markets Map module to get a quick overview of global market snapshot using zoomable world map. Drill down to check world indexes.