Correlation Between GM and Royce Opportunity

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

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

Diversification Opportunities for GM and Royce Opportunity

0.68

Correlation Coefficient

GM  Royce Opportunity

Poor diversification

The 3 months correlation between GM and Royce is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Royce Opportunity Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Royce Opportunity 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 Royce Opportunity. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Royce Opportunity has no effect on the direction of GM i.e., GM and Royce Opportunity go up and down completely randomly.

Pair Corralation between GM and Royce Opportunity

Allowing for the 90-day total investment horizon General Motors is expected to generate 1.49 times more return on investment than Royce Opportunity. However, GM is 1.49 times more volatile than Royce Opportunity Fund. It trades about 0.06 of its potential returns per unit of risk. Royce Opportunity Fund is currently generating about 0.04 per unit of risk. If you would invest  3,263  in General Motors on September 17, 2024 and sell it today you would earn a total of  1,990  from holding General Motors or generate 60.99% return on investment over 90 days.

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

General Motors  vs.  Royce Opportunity Fund

General Motors

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in General Motors are ranked lower than 6 (%) 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.

Royce Opportunity

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Royce Opportunity Fund are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Royce Opportunity 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 Royce Opportunity

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

The idea behind General Motors and Royce Opportunity Fund 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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.