Correlation Between GM and Allstate
Can any of the company-specific risk be diversified away by investing in both GM and Allstate 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 Allstate into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between General Motors and The Allstate, you can compare the effects of market volatilities on GM and Allstate 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 Allstate. Check out your portfolio center. Please also check ongoing floating volatility patterns of GM and Allstate.
Diversification Opportunities for GM and Allstate
Poor diversification
The 3 months correlation between GM and Allstate is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and The Allstate in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Allstate 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 Allstate. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Allstate has no effect on the direction of GM i.e., GM and Allstate go up and down completely randomly.
Pair Corralation between GM and Allstate
Allowing for the 90-day total investment horizon GM is expected to generate 1.08 times less return on investment than Allstate. In addition to that, GM is 1.61 times more volatile than The Allstate. It trades about 0.08 of its total potential returns per unit of risk. The Allstate is currently generating about 0.14 per unit of volatility. If you would invest 16,332 in The Allstate on August 31, 2024 and sell it today you would earn a total of 4,407 from holding The Allstate or generate 26.98% 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. The Allstate
Performance |
| Timeline |
| General Motors |
| Allstate |
GM and Allstate Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with GM and Allstate
The main advantage of trading using opposite GM and Allstate positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if GM position performs unexpectedly, Allstate 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 Allstate will offset losses from the drop in Allstate's long position.The idea behind General Motors and The Allstate 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .
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