Correlation Between GM and MT Bank

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

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

Diversification Opportunities for GM and MT Bank

0.92

Correlation Coefficient

GM  MT Bank

Almost no diversification

The 3 months correlation between GM and MTB is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and MT Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MT Bank 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 MT Bank. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of MT Bank has no effect on the direction of GM i.e., GM and MT Bank go up and down completely randomly.

Pair Corralation between GM and MT Bank

Allowing for the 90-day total investment horizon GM is expected to generate 1.75 times less return on investment than MT Bank. In addition to that, GM is 1.18 times more volatile than MT Bank. It trades about 0.09 of its total potential returns per unit of risk. MT Bank is currently generating about 0.19 per unit of volatility. If you would invest  17,132  in MT Bank on September 3, 2024 and sell it today you would earn a total of  4,867  from holding MT Bank or generate 28.41% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	100.0%
Values	Daily Returns

General Motors  vs.  MT Bank

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.

MT Bank

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in MT Bank are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, MT Bank sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with GM and MT Bank

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

The idea behind General Motors and MT Bank 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.