Correlation Between GM and American Aires

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

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

Diversification Opportunities for GM and American Aires

0.28

Correlation Coefficient

GM  American Aires

Modest diversification

The 3 months correlation between GM and American is 0.28. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and American Aires in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Aires 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 American Aires. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Aires has no effect on the direction of GM i.e., GM and American Aires go up and down completely randomly.

Pair Corralation between GM and American Aires

Allowing for the 90-day total investment horizon General Motors is expected to under-perform the American Aires. But the stock apears to be less risky and, when comparing its historical volatility, General Motors is 2.99 times less risky than American Aires. The stock trades about -0.03 of its potential returns per unit of risk. The American Aires is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  15.00  in American Aires on December 27, 2024 and sell it today you would lose (2.00) from holding American Aires or give up 13.33% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	96.77%
Values	Daily Returns

General Motors  vs.  American Aires

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.

American Aires

Risk-Adjusted Performance

Very Weak

Over the last 90 days American Aires has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, American Aires is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with GM and American Aires

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

The idea behind General Motors and American Aires 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.