Correlation Between GM and Donaldson
Can any of the company-specific risk be diversified away by investing in both GM and Donaldson 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 Donaldson into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between General Motors and Donaldson, you can compare the effects of market volatilities on GM and Donaldson 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 Donaldson. Check out your portfolio center. Please also check ongoing floating volatility patterns of GM and Donaldson.
Diversification Opportunities for GM and Donaldson
Poor diversification
The 3 months correlation between GM and Donaldson is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Donaldson in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Donaldson 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 Donaldson. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Donaldson has no effect on the direction of GM i.e., GM and Donaldson go up and down completely randomly.
Pair Corralation between GM and Donaldson
Allowing for the 90-day total investment horizon General Motors is expected to generate 1.78 times more return on investment than Donaldson. However, GM is 1.78 times more volatile than Donaldson. It trades about 0.11 of its potential returns per unit of risk. Donaldson is currently generating about 0.05 per unit of risk. If you would invest 4,077 in General Motors on August 27, 2024 and sell it today you would earn a total of 1,776 from holding General Motors or generate 43.56% 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. Donaldson
Performance |
| Timeline |
| General Motors |
| Donaldson |
GM and Donaldson Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with GM and Donaldson
The main advantage of trading using opposite GM and Donaldson positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if GM position performs unexpectedly, Donaldson 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 Donaldson will offset losses from the drop in Donaldson's long position.The idea behind General Motors and Donaldson 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.| Donaldson vs. IDEX Corporation | Donaldson vs. Watts Water Technologies | Donaldson vs. Gorman Rupp | Donaldson vs. Enerpac Tool Group |
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 Economic Indicators module to top statistical indicators that provide insights into how an economy is performing.
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