Correlation Between GM and National Capital

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

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

Diversification Opportunities for GM and National Capital

0.2

Correlation Coefficient

GM  National Capital

Modest diversification

The 3 months correlation between GM and National is 0.2. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and National Capital Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on National Capital 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 National Capital. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of National Capital Bank has no effect on the direction of GM i.e., GM and National Capital go up and down completely randomly.

Pair Corralation between GM and National Capital

Allowing for the 90-day total investment horizon General Motors is expected to under-perform the National Capital. But the stock apears to be less risky and, when comparing its historical volatility, General Motors is 2.52 times less risky than National Capital. The stock trades about -0.07 of its potential returns per unit of risk. The National Capital Bank is currently generating about -0.03 of returns per unit of risk over similar time horizon. If you would invest  7,975  in National Capital Bank on December 1, 2024 and sell it today you would lose (1,275) from holding National Capital Bank or give up 15.99% of portfolio value over 90 days.

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

General Motors  vs.  National Capital Bank

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.

National Capital Bank

Risk-Adjusted Performance

Very Weak

Over the last 90 days National Capital Bank has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with GM and National Capital

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

The idea behind General Motors and National Capital 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.

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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 ETFs module to find actively traded Exchange Traded Funds (ETF) from around the world.