Correlation Between GM and PharmChem

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

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

Diversification Opportunities for GM and PharmChem

-0.5

Correlation Coefficient

GM  PharmChem

Very good diversification

The 3 months correlation between GM and PharmChem is -0.5. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and PharmChem in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PharmChem 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 PharmChem. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of PharmChem has no effect on the direction of GM i.e., GM and PharmChem go up and down completely randomly.

Pair Corralation between GM and PharmChem

Allowing for the 90-day total investment horizon General Motors is expected to generate 0.8 times more return on investment than PharmChem. However, General Motors is 1.25 times less risky than PharmChem. It trades about 0.06 of its potential returns per unit of risk. PharmChem is currently generating about -0.08 per unit of risk. If you would invest  4,855  in General Motors on September 18, 2024 and sell it today you would earn a total of  369.00  from holding General Motors or generate 7.6% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	98.41%
Values	Daily Returns

General Motors  vs.  PharmChem

General Motors

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in General Motors are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of very weak primary indicators, GM may actually be approaching a critical reversion point that can send shares even higher in January 2025.

PharmChem

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days PharmChem has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's technical indicators remain very healthy which may send shares a bit higher in January 2025. The recent disarray may also be a sign of long period up-swing for the firm investors.

Pair Trading with GM and PharmChem

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

The idea behind General Motors and PharmChem 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.