Correlation Between GM and Northern Lights
Can any of the company-specific risk be diversified away by investing in both GM and Northern Lights 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 Northern Lights into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between General Motors and Northern Lights, you can compare the effects of market volatilities on GM and Northern Lights 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 Northern Lights. Check out your portfolio center. Please also check ongoing floating volatility patterns of GM and Northern Lights.
Diversification Opportunities for GM and Northern Lights
0.54 | Correlation Coefficient |
Very weak diversification
The 3 months correlation between GM and Northern is 0.54. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Northern Lights in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Lights 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 Northern Lights. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northern Lights has no effect on the direction of GM i.e., GM and Northern Lights go up and down completely randomly.
Pair Corralation between GM and Northern Lights
Allowing for the 90-day total investment horizon General Motors is expected to generate 2.55 times more return on investment than Northern Lights. However, GM is 2.55 times more volatile than Northern Lights. It trades about 0.05 of its potential returns per unit of risk. Northern Lights is currently generating about 0.08 per unit of risk. If you would invest 3,778 in General Motors on September 1, 2024 and sell it today you would earn a total of 1,781 from holding General Motors or generate 47.14% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Weak |
| Accuracy | 48.48% |
| Values | Daily Returns |
General Motors vs. Northern Lights
Performance |
| Timeline |
| General Motors |
| Northern Lights |
GM and Northern Lights Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with GM and Northern Lights
The main advantage of trading using opposite GM and Northern Lights positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if GM position performs unexpectedly, Northern Lights 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 Northern Lights will offset losses from the drop in Northern Lights' long position.The idea behind General Motors and Northern Lights 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.| Northern Lights vs. Vanguard Growth Index | Northern Lights vs. iShares Russell 1000 | Northern Lights vs. iShares SP 500 | Northern Lights vs. iShares Core SP |
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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.
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