Correlation Between GM and China High-Speed

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

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

Diversification Opportunities for GM and China High-Speed

0.11

Correlation Coefficient

GM  China High-Speed

Average diversification

The 3 months correlation between GM and China is 0.11. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and China High Speed Railway in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China High Speed 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 China High-Speed. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China High Speed has no effect on the direction of GM i.e., GM and China High-Speed go up and down completely randomly.

Pair Corralation between GM and China High-Speed

Allowing for the 90-day total investment horizon General Motors is expected to generate 0.83 times more return on investment than China High-Speed. However, General Motors is 1.2 times less risky than China High-Speed. It trades about -0.01 of its potential returns per unit of risk. China High Speed Railway is currently generating about -0.03 per unit of risk. If you would invest  5,168  in General Motors on December 20, 2024 and sell it today you would lose (189.00) from holding General Motors or give up 3.66% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	96.67%
Values	Daily Returns

General Motors  vs.  China High Speed Railway

General Motors

Risk-Adjusted Performance

Very Weak

Over the last 90 days General Motors has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy primary indicators, GM is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

China High Speed

Risk-Adjusted Performance

Very Weak

Over the last 90 days China High Speed Railway has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, China High-Speed 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 China High-Speed

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

The idea behind General Motors and China High Speed Railway 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.