Correlation Between GM and American Electric

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

Diversification Opportunities for GM and American Electric

-0.75

Correlation Coefficient

GM  American Electric

Pay attention - limited upside

The 3 months correlation between GM and American is -0.75. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and American Electric Power in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Electric Power 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 Electric. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Electric Power has no effect on the direction of GM i.e., GM and American Electric go up and down completely randomly.

Pair Corralation between GM and American Electric

Allowing for the 90-day total investment horizon General Motors is expected to under-perform the American Electric. In addition to that, GM is 1.71 times more volatile than American Electric Power. It trades about -0.01 of its total potential returns per unit of risk. American Electric Power is currently generating about 0.12 per unit of volatility. If you would invest  8,719  in American Electric Power on December 20, 2024 and sell it today you would earn a total of  881.00  from holding American Electric Power or generate 10.1% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	98.33%
Values	Daily Returns

General Motors  vs.  American Electric Power

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 Electric Power

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in American Electric Power are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively fragile basic indicators, American Electric may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with GM and American Electric

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

The idea behind General Motors and American Electric Power 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 Global Correlations module to find global opportunities by holding instruments from different markets.