Correlation Between GM and Wafer Works

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

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

Diversification Opportunities for GM and Wafer Works

0.57

Correlation Coefficient

GM  Wafer Works

Very weak diversification

The 3 months correlation between GM and Wafer is 0.57. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Wafer Works in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Wafer Works 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 Wafer Works. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Wafer Works has no effect on the direction of GM i.e., GM and Wafer Works go up and down completely randomly.

Pair Corralation between GM and Wafer Works

Allowing for the 90-day total investment horizon General Motors is expected to generate 0.83 times more return on investment than Wafer Works. However, General Motors is 1.2 times less risky than Wafer Works. It trades about -0.07 of its potential returns per unit of risk. Wafer Works is currently generating about -0.07 per unit of risk. If you would invest  5,492  in General Motors on December 2, 2024 and sell it today you would lose (579.00) from holding General Motors or give up 10.54% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	93.44%
Values	Daily Returns

General Motors  vs.  Wafer Works

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 latest weak performance, the Stock's primary indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

Wafer Works

Risk-Adjusted Performance

Very Weak

Over the last 90 days Wafer Works has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest abnormal performance, the Stock's basic indicators remain stable and the latest fuss on Wall Street may also be a sign of long-term gains for the venture sophisticated investors.

Pair Trading with GM and Wafer Works

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

The idea behind General Motors and Wafer Works 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.