Correlation Between GM and IPath Series

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

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

Diversification Opportunities for GM and IPath Series

-0.02

Correlation Coefficient

GM  IPath Series

Good diversification

The 3 months correlation between GM and IPath is -0.02. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and iPath Series B in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iPath Series B 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 IPath Series. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iPath Series B has no effect on the direction of GM i.e., GM and IPath Series go up and down completely randomly.

Pair Corralation between GM and IPath Series

Allowing for the 90-day total investment horizon General Motors is expected to under-perform the IPath Series. In addition to that, GM is 1.22 times more volatile than iPath Series B. It trades about -0.01 of its total potential returns per unit of risk. iPath Series B is currently generating about 0.02 per unit of volatility. If you would invest  2,709  in iPath Series B on December 25, 2024 and sell it today you would earn a total of  42.00  from holding iPath Series B or generate 1.55% return on investment over 90 days.

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

General Motors  vs.  iPath Series B

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.

iPath Series B

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in iPath Series B are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, IPath Series is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with GM and IPath Series

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

The idea behind General Motors and iPath Series B 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.