Correlation Between GM and Mid Capitalization

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

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

Diversification Opportunities for GM and Mid Capitalization

0.74

Correlation Coefficient

GM  Mid Capitalization

Poor diversification

The 3 months correlation between GM and Mid is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Mid Capitalization Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Mid Capitalization 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 Mid Capitalization. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Mid Capitalization has no effect on the direction of GM i.e., GM and Mid Capitalization go up and down completely randomly.

Pair Corralation between GM and Mid Capitalization

Allowing for the 90-day total investment horizon General Motors is expected to generate 1.08 times more return on investment than Mid Capitalization. However, GM is 1.08 times more volatile than Mid Capitalization Portfolio. It trades about 0.09 of its potential returns per unit of risk. Mid Capitalization Portfolio is currently generating about -0.01 per unit of risk. If you would invest  4,620  in General Motors on September 13, 2024 and sell it today you would earn a total of  610.00  from holding General Motors or generate 13.2% 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.  Mid Capitalization Portfolio

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.

Mid Capitalization

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Mid Capitalization Portfolio has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Mid Capitalization 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 Mid Capitalization

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

The idea behind General Motors and Mid Capitalization Portfolio 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.