Correlation Between GM and State Farm
Can any of the company-specific risk be diversified away by investing in both GM and State Farm 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 State Farm into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between General Motors and State Farm International, you can compare the effects of market volatilities on GM and State Farm 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 State Farm. Check out your portfolio center. Please also check ongoing floating volatility patterns of GM and State Farm.
Diversification Opportunities for GM and State Farm
-0.52 | Correlation Coefficient |
Excellent diversification
The 3 months correlation between GM and State is -0.52. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and State Farm International in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on State Farm International 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 State Farm. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of State Farm International has no effect on the direction of GM i.e., GM and State Farm go up and down completely randomly.
Pair Corralation between GM and State Farm
Allowing for the 90-day total investment horizon General Motors is expected to generate 3.4 times more return on investment than State Farm. However, GM is 3.4 times more volatile than State Farm International. It trades about 0.05 of its potential returns per unit of risk. State Farm International is currently generating about 0.07 per unit of risk. If you would invest 3,749 in General Motors on August 29, 2024 and sell it today you would earn a total of 1,801 from holding General Motors or generate 48.04% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
General Motors vs. State Farm International
Performance |
| Timeline |
| General Motors |
| State Farm International |
GM and State Farm Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with GM and State Farm
The main advantage of trading using opposite GM and State Farm positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if GM position performs unexpectedly, State Farm 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 State Farm will offset losses from the drop in State Farm's long position.The idea behind General Motors and State Farm International 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.| State Farm vs. Angel Oak Ultrashort | State Farm vs. Barings Active Short | State Farm vs. Federated Short Intermediate Duration | State Farm vs. Blrc Sgy Mnp |
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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