Correlation Between GM and MFT

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

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

Diversification Opportunities for GM and MFT

0.64

Correlation Coefficient

GM  MFT

Poor diversification

The 3 months correlation between GM and MFT is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and MFT in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MFT 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 MFT. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of MFT has no effect on the direction of GM i.e., GM and MFT go up and down completely randomly.

Pair Corralation between GM and MFT

If you would invest  5,096  in General Motors on September 2, 2024 and sell it today you would earn a total of  463.00  from holding General Motors or generate 9.09% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	4.76%
Values	Daily Returns

General Motors  vs.  MFT

General Motors

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in General Motors are ranked lower than 7 (%) 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.

MFT

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days MFT has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, MFT is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with GM and MFT

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

The idea behind General Motors and MFT 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.