Correlation Between Ford and GM
Can any of the company-specific risk be diversified away by investing in both Ford and GM 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 Ford and GM into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Ford Motor and General Motors, you can compare the effects of market volatilities on Ford and GM 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 Ford with a short position of GM. Check out your portfolio center. Please also check ongoing floating volatility patterns of Ford and GM.
Diversification Opportunities for Ford and GM
Poor diversification
The 3 months correlation between Ford and GM is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding Ford Motor and General Motors in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on General Motors and Ford 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 Ford Motor are associated (or correlated) with GM. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of General Motors has no effect on the direction of Ford i.e., Ford and GM go up and down completely randomly.
Pair Corralation between Ford and GM
Given the investment horizon of 90 days Ford Motor is expected to under-perform the GM. In addition to that, Ford is 1.61 times more volatile than General Motors. It trades about -0.08 of its total potential returns per unit of risk. General Motors is currently generating about 0.08 per unit of volatility. If you would invest 74,519 in General Motors on February 2, 2024 and sell it today you would earn a total of 1,981 from holding General Motors or generate 2.66% return on investment over 90 days.
Time Period | 3 Months [change] |
Direction | Moves Together |
Strength | Significant |
Accuracy | 100.0% |
Values | Daily Returns |
Ford Motor vs. General Motors
Performance |
Timeline |
Ford Motor |
General Motors |
Ford and GM Volatility Contrast
Predicted Return Density |
Returns |
Pair Trading with Ford and GM
The main advantage of trading using opposite Ford and GM positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Ford position performs unexpectedly, GM 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 GM will offset losses from the drop in GM's long position.Ford vs. Grupo Sports World | Ford vs. Verizon Communications | Ford vs. United Airlines Holdings | Ford vs. Delta Air Lines |
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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 Transaction History module to view history of all your transactions and understand their impact on performance.
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