Correlation Between GM and China Railway

Can any of the company-specific risk be diversified away by investing in both GM and China Railway 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 Railway 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 Railway Construction, you can compare the effects of market volatilities on GM and China Railway 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 Railway. Check out your portfolio center. Please also check ongoing floating volatility patterns of GM and China Railway.

Diversification Opportunities for GM and China Railway

0.12

Correlation Coefficient

GM  China Railway

Average diversification

The 3 months correlation between GM and China is 0.12. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and China Railway Construction in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Railway Constr 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 Railway. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Railway Constr has no effect on the direction of GM i.e., GM and China Railway go up and down completely randomly.

Pair Corralation between GM and China Railway

Allowing for the 90-day total investment horizon General Motors is expected to generate 0.79 times more return on investment than China Railway. However, General Motors is 1.27 times less risky than China Railway. It trades about 0.12 of its potential returns per unit of risk. China Railway Construction is currently generating about 0.04 per unit of risk. If you would invest  2,851  in General Motors on September 23, 2024 and sell it today you would earn a total of  2,330  from holding General Motors or generate 81.73% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	98.9%
Values	Daily Returns

General Motors  vs.  China Railway Construction

General Motors

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in General Motors are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating primary indicators, GM may actually be approaching a critical reversion point that can send shares even higher in January 2025.

China Railway Constr

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in China Railway Construction are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain basic indicators, China Railway reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with GM and China Railway

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

The idea behind General Motors and China Railway Construction 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 Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.