Correlation Between GM and Exxon
Can any of the company-specific risk be diversified away by investing in both GM and Exxon 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 Exxon into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between General Motors and Exxon Mobil, you can compare the effects of market volatilities on GM and Exxon 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 Exxon. Check out your portfolio center. Please also check ongoing floating volatility patterns of GM and Exxon.
Diversification Opportunities for GM and Exxon
Poor diversification
The 3 months correlation between GM and Exxon is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Exxon Mobil in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Exxon Mobil 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 Exxon. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Exxon Mobil has no effect on the direction of GM i.e., GM and Exxon go up and down completely randomly.
Pair Corralation between GM and Exxon
Allowing for the 90-day total investment horizon General Motors is expected to generate 1.58 times more return on investment than Exxon. However, GM is 1.58 times more volatile than Exxon Mobil. It trades about 0.07 of its potential returns per unit of risk. Exxon Mobil is currently generating about 0.12 per unit of risk. If you would invest 5,273 in General Motors on August 28, 2024 and sell it today you would earn a total of 206.00 from holding General Motors or generate 3.91% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 95.45% |
| Values | Daily Returns |
General Motors vs. Exxon Mobil
Performance |
| Timeline |
| General Motors |
| Exxon Mobil |
GM and Exxon Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with GM and Exxon
The main advantage of trading using opposite GM and Exxon positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if GM position performs unexpectedly, Exxon 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 Exxon will offset losses from the drop in Exxon's long position.The idea behind General Motors and Exxon Mobil 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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.
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