Correlation Between GMS and Cars

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

By analyzing existing cross correlation between GMS Inc and Cars Inc, you can compare the effects of market volatilities on GMS and Cars 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 GMS with a short position of Cars. Check out your portfolio center. Please also check ongoing floating volatility patterns of GMS and Cars.

Diversification Opportunities for GMS and Cars

0.64

Correlation Coefficient

GMS  Cars

Poor diversification

The 3 months correlation between GMS and Cars is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding GMS Inc and Cars Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cars Inc and GMS 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 GMS Inc are associated (or correlated) with Cars. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cars Inc has no effect on the direction of GMS i.e., GMS and Cars go up and down completely randomly.

Pair Corralation between GMS and Cars

Considering the 90-day investment horizon GMS Inc is expected to under-perform the Cars. But the stock apears to be less risky and, when comparing its historical volatility, GMS Inc is 1.12 times less risky than Cars. The stock trades about -0.16 of its potential returns per unit of risk. The Cars Inc is currently generating about -0.03 of returns per unit of risk over similar time horizon. If you would invest  1,939  in Cars Inc on September 11, 2024 and sell it today you would lose (25.00) from holding Cars Inc or give up 1.29% of portfolio value over 90 days.

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

GMS Inc  vs.  Cars Inc

GMS Inc

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in GMS Inc are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak primary indicators, GMS unveiled solid returns over the last few months and may actually be approaching a breakup point.

Cars Inc

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Cars Inc are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively inconsistent basic indicators, Cars unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with GMS and Cars

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

The idea behind GMS Inc and Cars Inc 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 Headlines Timeline module to stay connected to all market stories and filter out noise. Drill down to analyze hype elasticity.