Correlation Between GM and Small Company
Can any of the company-specific risk be diversified away by investing in both GM and Small Company 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 Small Company into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between General Motors and Small Pany Value, you can compare the effects of market volatilities on GM and Small Company 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 Small Company. Check out your portfolio center. Please also check ongoing floating volatility patterns of GM and Small Company.
Diversification Opportunities for GM and Small Company
0.83 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between GM and Small is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Small Pany Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Pany Value 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 Small Company. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Pany Value has no effect on the direction of GM i.e., GM and Small Company go up and down completely randomly.
Pair Corralation between GM and Small Company
Allowing for the 90-day total investment horizon GM is expected to generate 1.03 times less return on investment than Small Company. In addition to that, GM is 1.57 times more volatile than Small Pany Value. It trades about 0.13 of its total potential returns per unit of risk. Small Pany Value is currently generating about 0.22 per unit of volatility. If you would invest 3,894 in Small Pany Value on August 30, 2024 and sell it today you would earn a total of 333.00 from holding Small Pany Value or generate 8.55% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
General Motors vs. Small Pany Value
Performance |
| Timeline |
| General Motors |
| Small Pany Value |
GM and Small Company Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with GM and Small Company
The main advantage of trading using opposite GM and Small Company positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if GM position performs unexpectedly, Small Company 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 Small Company will offset losses from the drop in Small Company's long position.The idea behind General Motors and Small Pany Value 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.| Small Company vs. Blackrock Sm Cap | Small Company vs. Massmutual Premier Diversified | Small Company vs. Tax Managed Mid Small | Small Company vs. Adams Diversified Equity |
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 Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.
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