Correlation Between GM and BCPT
Can any of the company-specific risk be diversified away by investing in both GM and BCPT 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 BCPT into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between General Motors and BCPT, you can compare the effects of market volatilities on GM and BCPT 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 BCPT. Check out your portfolio center. Please also check ongoing floating volatility patterns of GM and BCPT.
Diversification Opportunities for GM and BCPT
Very weak diversification
The 3 months correlation between GM and BCPT is 0.54. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and BCPT in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BCPT 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 BCPT. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BCPT has no effect on the direction of GM i.e., GM and BCPT go up and down completely randomly.
Pair Corralation between GM and BCPT
Allowing for the 90-day total investment horizon GM is expected to generate 1.84 times less return on investment than BCPT. But when comparing it to its historical volatility, General Motors is 1.34 times less risky than BCPT. It trades about 0.04 of its potential returns per unit of risk. BCPT is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest 0.19 in BCPT on December 14, 2024 and sell it today you would earn a total of 0.06 from holding BCPT or generate 31.28% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Weak |
| Accuracy | 96.6% |
| Values | Daily Returns |
General Motors vs. BCPT
Performance |
| Timeline |
| General Motors |
| BCPT |
GM and BCPT Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with GM and BCPT
The main advantage of trading using opposite GM and BCPT positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if GM position performs unexpectedly, BCPT 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 BCPT will offset losses from the drop in BCPT's long position.The idea behind General Motors and BCPT 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.
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