Correlation Between GM and First National
Can any of the company-specific risk be diversified away by investing in both GM and First National 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 First National into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between General Motors and First National Corp, you can compare the effects of market volatilities on GM and First National 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 First National. Check out your portfolio center. Please also check ongoing floating volatility patterns of GM and First National.
Diversification Opportunities for GM and First National
0.9 | Correlation Coefficient |
Almost no diversification
The 3 months correlation between GM and First is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and First National Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First National Corp 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 First National. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First National Corp has no effect on the direction of GM i.e., GM and First National go up and down completely randomly.
Pair Corralation between GM and First National
Allowing for the 90-day total investment horizon General Motors is expected to generate 1.2 times more return on investment than First National. However, GM is 1.2 times more volatile than First National Corp. It trades about 0.14 of its potential returns per unit of risk. First National Corp is currently generating about 0.07 per unit of risk. If you would invest 3,135 in General Motors on August 26, 2024 and sell it today you would earn a total of 2,718 from holding General Motors or generate 86.7% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
General Motors vs. First National Corp
Performance |
| Timeline |
| General Motors |
| First National Corp |
GM and First National Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with GM and First National
The main advantage of trading using opposite GM and First National positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if GM position performs unexpectedly, First National 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 First National will offset losses from the drop in First National's long position.The idea behind General Motors and First National Corp 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.| First National vs. Home Federal Bancorp | First National vs. Lake Shore Bancorp | First National vs. Oak Valley Bancorp | First National vs. Community West Bancshares |
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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.
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