Correlation Between GM and Madison E

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

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

Diversification Opportunities for GM and Madison E

-0.78

Correlation Coefficient

GM  Madison E

Pay attention - limited upside

The 3 months correlation between GM and Madison is -0.78. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Madison E Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Madison E Bond 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 Madison E. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Madison E Bond has no effect on the direction of GM i.e., GM and Madison E go up and down completely randomly.

Pair Corralation between GM and Madison E

Allowing for the 90-day total investment horizon General Motors is expected to generate 8.5 times more return on investment than Madison E. However, GM is 8.5 times more volatile than Madison E Bond. It trades about 0.09 of its potential returns per unit of risk. Madison E Bond is currently generating about -0.16 per unit of risk. If you would invest  4,676  in General Motors on September 14, 2024 and sell it today you would earn a total of  554.00  from holding General Motors or generate 11.85% 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.  Madison E Bond

General Motors

Risk-Adjusted Performance

6 of 100

OK

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.

Madison E Bond

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Madison E Bond has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Madison E is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with GM and Madison E

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

The idea behind General Motors and Madison E Bond 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.