Correlation Between GM and Reynolds

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

By analyzing existing cross correlation between General Motors and Reynolds American 725, you can compare the effects of market volatilities on GM and Reynolds 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 Reynolds. Check out your portfolio center. Please also check ongoing floating volatility patterns of GM and Reynolds.

Diversification Opportunities for GM and Reynolds

-0.33

Correlation Coefficient

GM  Reynolds

Very good diversification

The 3 months correlation between GM and Reynolds is -0.33. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Reynolds American 725 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Reynolds American 725 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 Reynolds. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Reynolds American 725 has no effect on the direction of GM i.e., GM and Reynolds go up and down completely randomly.

Pair Corralation between GM and Reynolds

Allowing for the 90-day total investment horizon General Motors is expected to under-perform the Reynolds. In addition to that, GM is 3.17 times more volatile than Reynolds American 725. It trades about -0.07 of its total potential returns per unit of risk. Reynolds American 725 is currently generating about 0.06 per unit of volatility. If you would invest  11,051  in Reynolds American 725 on December 30, 2024 and sell it today you would earn a total of  332.00  from holding Reynolds American 725 or generate 3.0% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	93.55%
Values	Daily Returns

General Motors  vs.  Reynolds American 725

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.

Reynolds American 725

Risk-Adjusted Performance

Very Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Reynolds American 725 are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Reynolds is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with GM and Reynolds

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

The idea behind General Motors and Reynolds American 725 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.