Correlation Between GM and Plumb Balanced

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

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

Diversification Opportunities for GM and Plumb Balanced

0.78

Correlation Coefficient

GM  Plumb Balanced

Poor diversification

The 3 months correlation between GM and Plumb is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Plumb Balanced in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Plumb Balanced 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 Plumb Balanced. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Plumb Balanced has no effect on the direction of GM i.e., GM and Plumb Balanced go up and down completely randomly.

Pair Corralation between GM and Plumb Balanced

Allowing for the 90-day total investment horizon General Motors is expected to generate 4.17 times more return on investment than Plumb Balanced. However, GM is 4.17 times more volatile than Plumb Balanced. It trades about 0.09 of its potential returns per unit of risk. Plumb Balanced is currently generating about 0.13 per unit of risk. If you would invest  4,676  in General Motors on September 15, 2024 and sell it today you would earn a total of  577.00  from holding General Motors or generate 12.34% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	100.0%
Values	Daily Returns

General Motors  vs.  Plumb Balanced

General Motors

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in General Motors are ranked lower than 6 (%) 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.

Plumb Balanced

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Plumb Balanced are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental drivers, Plumb Balanced is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with GM and Plumb Balanced

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

The idea behind General Motors and Plumb Balanced 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.