Correlation Between GM and International Business

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

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

Diversification Opportunities for GM and International Business

-0.79

Correlation Coefficient

GM  International Business

Pay attention - limited upside

The 3 months correlation between GM and International is -0.79. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and International Business Machine in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on International Business 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 International Business. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of International Business has no effect on the direction of GM i.e., GM and International Business go up and down completely randomly.

Pair Corralation between GM and International Business

Allowing for the 90-day total investment horizon General Motors is expected to under-perform the International Business. In addition to that, GM is 1.22 times more volatile than International Business Machines. It trades about -0.07 of its total potential returns per unit of risk. International Business Machines is currently generating about 0.09 per unit of volatility. If you would invest  21,879  in International Business Machines on December 28, 2024 and sell it today you would earn a total of  2,521  from holding International Business Machines or generate 11.52% return on investment over 90 days.

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

General Motors  vs.  International Business Machine

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.

International Business

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in International Business Machines are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of very inconsistent fundamental drivers, International Business displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with GM and International Business

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

The idea behind General Motors and International Business Machines 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.