Correlation Between GM and Connecticut Light

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

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

Diversification Opportunities for GM and Connecticut Light

-0.34

Correlation Coefficient

GM  Connecticut Light

Very good diversification

The 3 months correlation between GM and Connecticut is -0.34. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and The Connecticut Light in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Connecticut Light 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 Connecticut Light. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Connecticut Light has no effect on the direction of GM i.e., GM and Connecticut Light go up and down completely randomly.

Pair Corralation between GM and Connecticut Light

Allowing for the 90-day total investment horizon General Motors is expected to generate 0.47 times more return on investment than Connecticut Light. However, General Motors is 2.14 times less risky than Connecticut Light. It trades about 0.06 of its potential returns per unit of risk. The Connecticut Light is currently generating about 0.02 per unit of risk. If you would invest  3,283  in General Motors on September 12, 2024 and sell it today you would earn a total of  1,991  from holding General Motors or generate 60.65% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	48.28%
Values	Daily Returns

General Motors  vs.  The Connecticut Light

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.

Connecticut Light

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days The Connecticut Light has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy technical indicators, Connecticut Light is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with GM and Connecticut Light

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

The idea behind General Motors and The Connecticut Light 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 File Import module to quickly import all of your third-party portfolios from your local drive in csv format.