Correlation Between GM and Big Rock

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

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

Diversification Opportunities for GM and Big Rock

-0.67

Correlation Coefficient

GM  Big Rock

Excellent diversification

The 3 months correlation between GM and Big is -0.67. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Big Rock Brewery in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Big Rock Brewery 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 Big Rock. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Big Rock Brewery has no effect on the direction of GM i.e., GM and Big Rock go up and down completely randomly.

Pair Corralation between GM and Big Rock

Allowing for the 90-day total investment horizon General Motors is expected to generate 0.55 times more return on investment than Big Rock. However, General Motors is 1.82 times less risky than Big Rock. It trades about -0.12 of its potential returns per unit of risk. Big Rock Brewery is currently generating about -0.11 per unit of risk. If you would invest  5,230  in General Motors on October 13, 2024 and sell it today you would lose (245.00) from holding General Motors or give up 4.68% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	100.0%
Values	Daily Returns

General Motors  vs.  Big Rock Brewery

General Motors

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in General Motors are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. 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.

Big Rock Brewery

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with GM and Big Rock

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

The idea behind General Motors and Big Rock Brewery 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 Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.