Correlation Between GM and Software Effective

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

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

Diversification Opportunities for GM and Software Effective

-0.25

Correlation Coefficient

GM  Software Effective

Very good diversification

The 3 months correlation between GM and Software is -0.25. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Software Effective Solutions in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Software Effective 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 Software Effective. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Software Effective has no effect on the direction of GM i.e., GM and Software Effective go up and down completely randomly.

Pair Corralation between GM and Software Effective

Allowing for the 90-day total investment horizon GM is expected to generate 18.73 times less return on investment than Software Effective. But when comparing it to its historical volatility, General Motors is 11.04 times less risky than Software Effective. It trades about 0.09 of its potential returns per unit of risk. Software Effective Solutions is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest  1.20  in Software Effective Solutions on September 15, 2024 and sell it today you would earn a total of  1.30  from holding Software Effective Solutions or generate 108.33% return on investment over 90 days.

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

General Motors  vs.  Software Effective Solutions

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.

Software Effective

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Software Effective Solutions are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Even with relatively inconsistent basic indicators, Software Effective revealed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with GM and Software Effective

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

The idea behind General Motors and Software Effective Solutions 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 Funds Screener module to find actively-traded funds from around the world traded on over 30 global exchanges.