Correlation Between General Electric and Broadcom

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

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

Diversification Opportunities for General Electric and Broadcom

0.21

Correlation Coefficient

General Electric  Broadcom

Modest diversification

The 3 months correlation between General and Broadcom is 0.21. Overlapping area represents the amount of risk that can be diversified away by holding General Electric and Broadcom in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Broadcom and General Electric 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 Electric are associated (or correlated) with Broadcom. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Broadcom has no effect on the direction of General Electric i.e., General Electric and Broadcom go up and down completely randomly.

Pair Corralation between General Electric and Broadcom

Assuming the 90 days trading horizon General Electric is expected to under-perform the Broadcom. But the stock apears to be less risky and, when comparing its historical volatility, General Electric is 3.11 times less risky than Broadcom. The stock trades about -0.05 of its potential returns per unit of risk. The Broadcom is currently generating about 0.31 of returns per unit of risk over similar time horizon. If you would invest  1,366  in Broadcom on September 16, 2024 and sell it today you would earn a total of  577.00  from holding Broadcom or generate 42.24% return on investment over 90 days.

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

General Electric  vs.  Broadcom

General Electric

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in General Electric are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, General Electric is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Broadcom

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Broadcom are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Despite somewhat uncertain technical and fundamental indicators, Broadcom sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with General Electric and Broadcom

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

The idea behind General Electric and Broadcom 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.