Correlation Between GM and Tower Semiconductor

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

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

Diversification Opportunities for GM and Tower Semiconductor

0.53

Correlation Coefficient

GM  Tower Semiconductor

Very weak diversification

The 3 months correlation between GM and Tower is 0.53. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Tower Semiconductor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tower Semiconductor 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 Tower Semiconductor. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tower Semiconductor has no effect on the direction of GM i.e., GM and Tower Semiconductor go up and down completely randomly.

Pair Corralation between GM and Tower Semiconductor

Allowing for the 90-day total investment horizon General Motors is expected to generate 0.71 times more return on investment than Tower Semiconductor. However, General Motors is 1.42 times less risky than Tower Semiconductor. It trades about 0.05 of its potential returns per unit of risk. Tower Semiconductor is currently generating about -0.06 per unit of risk. If you would invest  4,423  in General Motors on February 5, 2024 and sell it today you would earn a total of  63.00  from holding General Motors or generate 1.42% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	63.64%
Values	Daily Returns

General Motors  vs.  Tower Semiconductor

General Motors

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in General Motors are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of very weak primary indicators, GM displayed solid returns over the last few months and may actually be approaching a breakup point.

Tower Semiconductor

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Tower Semiconductor are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Tower Semiconductor sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with GM and Tower Semiconductor

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

The idea behind General Motors and Tower Semiconductor 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.

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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 Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.