Correlation Between GM and Spectra Systems

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

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

Diversification Opportunities for GM and Spectra Systems

0.31

Correlation Coefficient

GM  Spectra Systems

Weak diversification

The 3 months correlation between GM and Spectra is 0.31. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Spectra Systems Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Spectra Systems Corp 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 Spectra Systems. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Spectra Systems Corp has no effect on the direction of GM i.e., GM and Spectra Systems go up and down completely randomly.

Pair Corralation between GM and Spectra Systems

Allowing for the 90-day total investment horizon General Motors is expected to under-perform the Spectra Systems. In addition to that, GM is 1.71 times more volatile than Spectra Systems Corp. It trades about -0.06 of its total potential returns per unit of risk. Spectra Systems Corp is currently generating about -0.07 per unit of volatility. If you would invest  23,200  in Spectra Systems Corp on December 28, 2024 and sell it today you would lose (1,700) from holding Spectra Systems Corp or give up 7.33% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	95.24%
Values	Daily Returns

General Motors  vs.  Spectra Systems Corp

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.

Spectra Systems Corp

Risk-Adjusted Performance

Very Weak

Over the last 90 days Spectra Systems Corp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's basic indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

Pair Trading with GM and Spectra Systems

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

The idea behind General Motors and Spectra Systems Corp 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.