Correlation Between GM and Teradyne

Can any of the company-specific risk be diversified away by investing in both GM and Teradyne 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 Teradyne into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between General Motors and Teradyne, you can compare the effects of market volatilities on GM and Teradyne 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 Teradyne. Check out your portfolio center. Please also check ongoing floating volatility patterns of GM and Teradyne.

Diversification Opportunities for GM and Teradyne

0.46

Correlation Coefficient

GM  Teradyne

Very weak diversification

The 3 months correlation between GM and Teradyne is 0.46. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Teradyne in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Teradyne 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 Teradyne. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Teradyne has no effect on the direction of GM i.e., GM and Teradyne go up and down completely randomly.

Pair Corralation between GM and Teradyne

Allowing for the 90-day total investment horizon GM is expected to generate 1.22 times less return on investment than Teradyne. But when comparing it to its historical volatility, General Motors is 1.15 times less risky than Teradyne. It trades about 0.04 of its potential returns per unit of risk. Teradyne is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  8,606  in Teradyne on March 5, 2024 and sell it today you would earn a total of  4,076  from holding Teradyne or generate 47.36% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.02%
Values	Daily Returns

General Motors  vs.  Teradyne

General Motors

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in General Motors are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of very weak primary indicators, GM may actually be approaching a critical reversion point that can send shares even higher in July 2024.

Teradyne

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Teradyne are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Teradyne reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with GM and Teradyne

The main advantage of trading using opposite GM and Teradyne positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if GM position performs unexpectedly, Teradyne 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 Teradyne will offset losses from the drop in Teradyne's long position.

The idea behind General Motors and Teradyne 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.