Correlation Between GM and Arad
Can any of the company-specific risk be diversified away by investing in both GM and Arad 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 Arad into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between General Motors and Arad, you can compare the effects of market volatilities on GM and Arad 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 Arad. Check out your portfolio center. Please also check ongoing floating volatility patterns of GM and Arad.
Diversification Opportunities for GM and Arad
Poor diversification
The 3 months correlation between GM and Arad is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Arad in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Arad 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 Arad. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Arad has no effect on the direction of GM i.e., GM and Arad go up and down completely randomly.
Pair Corralation between GM and Arad
Allowing for the 90-day total investment horizon GM is expected to generate 1.05 times less return on investment than Arad. In addition to that, GM is 1.85 times more volatile than Arad. It trades about 0.25 of its total potential returns per unit of risk. Arad is currently generating about 0.49 per unit of volatility. If you would invest 503,500 in Arad on August 25, 2024 and sell it today you would earn a total of 45,800 from holding Arad or generate 9.1% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 77.27% |
| Values | Daily Returns |
General Motors vs. Arad
Performance |
| Timeline |
| General Motors |
| Arad |
GM and Arad Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with GM and Arad
The main advantage of trading using opposite GM and Arad positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if GM position performs unexpectedly, Arad 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 Arad will offset losses from the drop in Arad's long position.The idea behind General Motors and Arad 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.| Arad vs. One Software Technologies | Arad vs. Ormat Technologies | Arad vs. Migdal Insurance | Arad vs. Bio Meat Foodtech |
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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.
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