Correlation Between GM and FAR

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

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

Diversification Opportunities for GM and FAR

0.33

Correlation Coefficient

GM  FAR

Weak diversification

The 3 months correlation between GM and FAR is 0.33. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and FAR Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on FAR Limited 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 FAR. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of FAR Limited has no effect on the direction of GM i.e., GM and FAR go up and down completely randomly.

Pair Corralation between GM and FAR

Allowing for the 90-day total investment horizon General Motors is expected to under-perform the FAR. In addition to that, GM is 1.91 times more volatile than FAR Limited. It trades about -0.01 of its total potential returns per unit of risk. FAR Limited is currently generating about 0.09 per unit of volatility. If you would invest  31.00  in FAR Limited on December 25, 2024 and sell it today you would earn a total of  2.00  from holding FAR Limited or generate 6.45% return on investment over 90 days.

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

General Motors  vs.  FAR Limited

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.

FAR Limited

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in FAR Limited are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, FAR may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with GM and FAR

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

The idea behind General Motors and FAR Limited 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.