Correlation Between GM and FACT II
Can any of the company-specific risk be diversified away by investing in both GM and FACT II 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 FACT II into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between General Motors and FACT II Acquisition, you can compare the effects of market volatilities on GM and FACT II 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 FACT II. Check out your portfolio center. Please also check ongoing floating volatility patterns of GM and FACT II.
Diversification Opportunities for GM and FACT II
Significant diversification
The 3 months correlation between GM and FACT is 0.01. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and FACT II Acquisition in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on FACT II Acquisition 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 FACT II. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of FACT II Acquisition has no effect on the direction of GM i.e., GM and FACT II go up and down completely randomly.
Pair Corralation between GM and FACT II
Allowing for the 90-day total investment horizon General Motors is expected to under-perform the FACT II. But the stock apears to be less risky and, when comparing its historical volatility, General Motors is 4.28 times less risky than FACT II. The stock trades about -0.05 of its potential returns per unit of risk. The FACT II Acquisition is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest 1,174 in FACT II Acquisition on November 3, 2024 and sell it today you would earn a total of 96.00 from holding FACT II Acquisition or generate 8.18% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
General Motors vs. FACT II Acquisition
Performance |
| Timeline |
| General Motors |
| FACT II Acquisition |
GM and FACT II Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with GM and FACT II
The main advantage of trading using opposite GM and FACT II positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if GM position performs unexpectedly, FACT II 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 FACT II will offset losses from the drop in FACT II's long position.The idea behind General Motors and FACT II Acquisition 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.
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