Correlation Between GM and ZEL
Can any of the company-specific risk be diversified away by investing in both GM and ZEL 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 ZEL into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between General Motors and ZEL, you can compare the effects of market volatilities on GM and ZEL 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 ZEL. Check out your portfolio center. Please also check ongoing floating volatility patterns of GM and ZEL.
Diversification Opportunities for GM and ZEL
Very poor diversification
The 3 months correlation between GM and ZEL is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and ZEL in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ZEL 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 ZEL. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ZEL has no effect on the direction of GM i.e., GM and ZEL go up and down completely randomly.
Pair Corralation between GM and ZEL
Allowing for the 90-day total investment horizon GM is expected to generate 5.31 times less return on investment than ZEL. But when comparing it to its historical volatility, General Motors is 3.33 times less risky than ZEL. It trades about 0.05 of its potential returns per unit of risk. ZEL is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest 3.15 in ZEL on September 2, 2024 and sell it today you would earn a total of 4.86 from holding ZEL or generate 154.29% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 60.48% |
| Values | Daily Returns |
General Motors vs. ZEL
Performance |
| Timeline |
| General Motors |
| ZEL |
GM and ZEL Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with GM and ZEL
The main advantage of trading using opposite GM and ZEL positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if GM position performs unexpectedly, ZEL 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 ZEL will offset losses from the drop in ZEL's long position.The idea behind General Motors and ZEL 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.
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