Correlation Between GM and Smallcap Fund

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

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

Diversification Opportunities for GM and Smallcap Fund

0.1

Correlation Coefficient

GM  Smallcap Fund

Average diversification

The 3 months correlation between GM and Smallcap is 0.1. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Smallcap Fund Fka in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Smallcap Fund Fka 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 Smallcap Fund. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Smallcap Fund Fka has no effect on the direction of GM i.e., GM and Smallcap Fund go up and down completely randomly.

Pair Corralation between GM and Smallcap Fund

Allowing for the 90-day total investment horizon General Motors is expected to generate 2.05 times more return on investment than Smallcap Fund. However, GM is 2.05 times more volatile than Smallcap Fund Fka. It trades about -0.03 of its potential returns per unit of risk. Smallcap Fund Fka is currently generating about -0.08 per unit of risk. If you would invest  5,404  in General Motors on December 26, 2024 and sell it today you would lose (309.00) from holding General Motors or give up 5.72% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	98.36%
Values	Daily Returns

General Motors  vs.  Smallcap Fund Fka

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 very healthy primary indicators, GM is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Smallcap Fund Fka

Risk-Adjusted Performance

Very Weak

Over the last 90 days Smallcap Fund Fka has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Smallcap Fund 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 Smallcap Fund

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

The idea behind General Motors and Smallcap Fund Fka 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.