Correlation Between GM and British Amer

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

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

Diversification Opportunities for GM and British Amer

-0.49

Correlation Coefficient

GM  British Amer

Very good diversification

The 3 months correlation between GM and British is -0.49. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and British American Tobacco in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on British American Tobacco 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 British Amer. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of British American Tobacco has no effect on the direction of GM i.e., GM and British Amer go up and down completely randomly.

Pair Corralation between GM and British Amer

Allowing for the 90-day total investment horizon General Motors is expected to under-perform the British Amer. In addition to that, GM is 1.68 times more volatile than British American Tobacco. It trades about -0.03 of its total potential returns per unit of risk. British American Tobacco is currently generating about 0.14 per unit of volatility. If you would invest  3,631  in British American Tobacco on December 27, 2024 and sell it today you would earn a total of  451.00  from holding British American Tobacco or generate 12.42% return on investment over 90 days.

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

General Motors  vs.  British American Tobacco

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.

British American Tobacco

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in British American Tobacco are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite fairly unfluctuating basic indicators, British Amer demonstrated solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with GM and British Amer

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

The idea behind General Motors and British American Tobacco 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 Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.