Correlation Between GM and American Rare

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

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

Diversification Opportunities for GM and American Rare

-0.53

Correlation Coefficient

GM  American Rare

Excellent diversification

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

Pair Corralation between GM and American Rare

Allowing for the 90-day total investment horizon GM is expected to generate 1.61 times less return on investment than American Rare. But when comparing it to its historical volatility, General Motors is 2.09 times less risky than American Rare. It trades about 0.06 of its potential returns per unit of risk. American Rare Earths is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  24.00  in American Rare Earths on September 12, 2024 and sell it today you would earn a total of  3.00  from holding American Rare Earths or generate 12.5% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	96.9%
Values	Daily Returns

General Motors  vs.  American Rare Earths

General Motors

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in General Motors are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating primary indicators, GM displayed solid returns over the last few months and may actually be approaching a breakup point.

American Rare Earths

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in American Rare Earths are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable basic indicators, American Rare is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with GM and American Rare

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

The idea behind General Motors and American Rare Earths 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.