Correlation Between GM and Legacy Housing

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

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

Diversification Opportunities for GM and Legacy Housing

-0.37

Correlation Coefficient

GM  Legacy Housing

Very good diversification

The 3 months correlation between GM and Legacy is -0.37. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Legacy Housing Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Legacy Housing Corp 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 Legacy Housing. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Legacy Housing Corp has no effect on the direction of GM i.e., GM and Legacy Housing go up and down completely randomly.

Pair Corralation between GM and Legacy Housing

Allowing for the 90-day total investment horizon General Motors is expected to generate 0.86 times more return on investment than Legacy Housing. However, General Motors is 1.16 times less risky than Legacy Housing. It trades about 0.05 of its potential returns per unit of risk. Legacy Housing Corp is currently generating about 0.04 per unit of risk. If you would invest  3,692  in General Motors on September 5, 2024 and sell it today you would earn a total of  1,674  from holding General Motors or generate 45.34% 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.  Legacy Housing Corp

General Motors

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in General Motors are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of very weak primary indicators, GM displayed solid returns over the last few months and may actually be approaching a breakup point.

Legacy Housing Corp

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Legacy Housing Corp are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite fairly strong technical and fundamental indicators, Legacy Housing is not utilizing all of its potentials. The recent stock price confusion, may contribute to short-horizon losses for the traders.

Pair Trading with GM and Legacy Housing

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

The idea behind General Motors and Legacy Housing Corp 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.