Correlation Between GM and TRB

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

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

Diversification Opportunities for GM and TRB

0.51

Correlation Coefficient

GM  TRB

Very weak diversification

The 3 months correlation between GM and TRB is 0.51. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and TRB in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on TRB 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 TRB. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of TRB has no effect on the direction of GM i.e., GM and TRB go up and down completely randomly.

Pair Corralation between GM and TRB

Allowing for the 90-day total investment horizon GM is expected to generate 30.86 times less return on investment than TRB. But when comparing it to its historical volatility, General Motors is 24.95 times less risky than TRB. It trades about 0.04 of its potential returns per unit of risk. TRB is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  1,676  in TRB on October 23, 2024 and sell it today you would earn a total of  3,483  from holding TRB or generate 207.82% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	60.0%
Values	Daily Returns

General Motors  vs.  TRB

General Motors

Risk-Adjusted Performance

0 of 100

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.

TRB

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days TRB has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound fundamental drivers, TRB is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with GM and TRB

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

The idea behind General Motors and TRB 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.