Correlation Between GM and Me Lin

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

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

Diversification Opportunities for GM and Me Lin

0.2

Correlation Coefficient

GM  Me Lin

Modest diversification

The 3 months correlation between GM and MEL is 0.2. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Me Lin Steel in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Me Lin Steel 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 Me Lin. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Me Lin Steel has no effect on the direction of GM i.e., GM and Me Lin go up and down completely randomly.

Pair Corralation between GM and Me Lin

Allowing for the 90-day total investment horizon General Motors is expected to under-perform the Me Lin. But the stock apears to be less risky and, when comparing its historical volatility, General Motors is 4.22 times less risky than Me Lin. The stock trades about -0.07 of its potential returns per unit of risk. The Me Lin Steel is currently generating about 0.33 of returns per unit of risk over similar time horizon. If you would invest  580,000  in Me Lin Steel on September 29, 2024 and sell it today you would earn a total of  150,000  from holding Me Lin Steel or generate 25.86% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	65.0%
Values	Daily Returns

General Motors  vs.  Me Lin Steel

General Motors

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in General Motors are ranked lower than 11 (%) 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.

Me Lin Steel

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Me Lin Steel are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating essential indicators, Me Lin displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with GM and Me Lin

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

The idea behind General Motors and Me Lin Steel 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.