Correlation Between GM and BorgWarner

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

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

Diversification Opportunities for GM and BorgWarner

0.72

Correlation Coefficient

GM  BorgWarner

Poor diversification

The 3 months correlation between GM and BorgWarner is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and BorgWarner in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BorgWarner 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 BorgWarner. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BorgWarner has no effect on the direction of GM i.e., GM and BorgWarner go up and down completely randomly.

Pair Corralation between GM and BorgWarner

Allowing for the 90-day total investment horizon General Motors is expected to generate 1.46 times more return on investment than BorgWarner. However, GM is 1.46 times more volatile than BorgWarner. It trades about -0.03 of its potential returns per unit of risk. BorgWarner is currently generating about -0.05 per unit of risk. If you would invest  5,404  in General Motors on December 26, 2024 and sell it today you would lose (309.00) from holding General Motors or give up 5.72% of portfolio value over 90 days.

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

General Motors  vs.  BorgWarner

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.

BorgWarner

Risk-Adjusted Performance

Very Weak

Over the last 90 days BorgWarner has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, BorgWarner is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with GM and BorgWarner

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

The idea behind General Motors and BorgWarner 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 Center module to all portfolio management and optimization tools to improve performance of your portfolios.