Correlation Between GM and Fancy Wood

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

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

Diversification Opportunities for GM and Fancy Wood

0.64

Correlation Coefficient

GM  Fancy Wood

Poor diversification

The 3 months correlation between GM and Fancy is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Fancy Wood Industries in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Fancy Wood Industries 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 Fancy Wood. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Fancy Wood Industries has no effect on the direction of GM i.e., GM and Fancy Wood go up and down completely randomly.

Pair Corralation between GM and Fancy Wood

Allowing for the 90-day total investment horizon General Motors is expected to under-perform the Fancy Wood. But the stock apears to be less risky and, when comparing its historical volatility, General Motors is 1.61 times less risky than Fancy Wood. The stock trades about -0.07 of its potential returns per unit of risk. The Fancy Wood Industries is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  37.00  in Fancy Wood Industries on December 27, 2024 and sell it today you would earn a total of  6.00  from holding Fancy Wood Industries or generate 16.22% return on investment over 90 days.

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

General Motors  vs.  Fancy Wood Industries

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 latest weak performance, the Stock's primary indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

Fancy Wood Industries

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Fancy Wood Industries are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak fundamental drivers, Fancy Wood sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with GM and Fancy Wood

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

The idea behind General Motors and Fancy Wood Industries 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 ETFs module to find actively traded Exchange Traded Funds (ETF) from around the world.