Correlation Between GM and Sp 500
Can any of the company-specific risk be diversified away by investing in both GM and Sp 500 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 Sp 500 into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between General Motors and Sp 500 Index, you can compare the effects of market volatilities on GM and Sp 500 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 Sp 500. Check out your portfolio center. Please also check ongoing floating volatility patterns of GM and Sp 500.
Diversification Opportunities for GM and Sp 500
Poor diversification
The 3 months correlation between GM and SPFIX is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Sp 500 Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sp 500 Index 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 Sp 500. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sp 500 Index has no effect on the direction of GM i.e., GM and Sp 500 go up and down completely randomly.
Pair Corralation between GM and Sp 500
Allowing for the 90-day total investment horizon General Motors is expected to generate 2.34 times more return on investment than Sp 500. However, GM is 2.34 times more volatile than Sp 500 Index. It trades about 0.09 of its potential returns per unit of risk. Sp 500 Index is currently generating about 0.1 per unit of risk. If you would invest 3,117 in General Motors on August 26, 2024 and sell it today you would earn a total of 2,736 from holding General Motors or generate 87.78% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
General Motors vs. Sp 500 Index
Performance |
| Timeline |
| General Motors |
| Sp 500 Index |
GM and Sp 500 Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with GM and Sp 500
The main advantage of trading using opposite GM and Sp 500 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if GM position performs unexpectedly, Sp 500 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 Sp 500 will offset losses from the drop in Sp 500's long position.The idea behind General Motors and Sp 500 Index 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.| Sp 500 vs. Sp Midcap Index | Sp 500 vs. Sp Smallcap Index | Sp 500 vs. Deutsche Equity 500 | Sp 500 vs. Dreyfus Institutional 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.
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