Correlation Between GM and PlayD
Can any of the company-specific risk be diversified away by investing in both GM and PlayD 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 PlayD into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between General Motors and PlayD Co, you can compare the effects of market volatilities on GM and PlayD 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 PlayD. Check out your portfolio center. Please also check ongoing floating volatility patterns of GM and PlayD.
Diversification Opportunities for GM and PlayD
Very weak diversification
The 3 months correlation between GM and PlayD is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and PlayD Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PlayD 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 PlayD. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of PlayD has no effect on the direction of GM i.e., GM and PlayD go up and down completely randomly.
Pair Corralation between GM and PlayD
Allowing for the 90-day total investment horizon GM is expected to generate 1.18 times less return on investment than PlayD. But when comparing it to its historical volatility, General Motors is 2.46 times less risky than PlayD. It trades about 0.05 of its potential returns per unit of risk. PlayD Co is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest 522,000 in PlayD Co on August 25, 2024 and sell it today you would earn a total of 23,000 from holding PlayD Co or generate 4.41% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Weak |
| Accuracy | 97.38% |
| Values | Daily Returns |
General Motors vs. PlayD Co
Performance |
| Timeline |
| General Motors |
| PlayD |
GM and PlayD Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with GM and PlayD
The main advantage of trading using opposite GM and PlayD positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if GM position performs unexpectedly, PlayD 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 PlayD will offset losses from the drop in PlayD's long position.The idea behind General Motors and PlayD Co 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.Check out your portfolio center.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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.
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