Correlation Between GM and New Wave
Can any of the company-specific risk be diversified away by investing in both GM and New Wave 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 New Wave into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between General Motors and New Wave Holdings, you can compare the effects of market volatilities on GM and New Wave 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 New Wave. Check out your portfolio center. Please also check ongoing floating volatility patterns of GM and New Wave.
Diversification Opportunities for GM and New Wave
Good diversification
The 3 months correlation between GM and New is -0.11. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and New Wave Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on New Wave Holdings 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 New Wave. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of New Wave Holdings has no effect on the direction of GM i.e., GM and New Wave go up and down completely randomly.
Pair Corralation between GM and New Wave
Allowing for the 90-day total investment horizon GM is expected to generate 35.25 times less return on investment than New Wave. But when comparing it to its historical volatility, General Motors is 25.36 times less risky than New Wave. It trades about 0.05 of its potential returns per unit of risk. New Wave Holdings is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest 1.84 in New Wave Holdings on August 26, 2024 and sell it today you would lose (0.63) from holding New Wave Holdings or give up 34.24% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
General Motors vs. New Wave Holdings
Performance |
| Timeline |
| General Motors |
| New Wave Holdings |
GM and New Wave Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with GM and New Wave
The main advantage of trading using opposite GM and New Wave positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if GM position performs unexpectedly, New Wave 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 New Wave will offset losses from the drop in New Wave's long position.The idea behind General Motors and New Wave Holdings 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.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 Share Portfolio module to track or share privately all of your investments from the convenience of any device.
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