Correlation Between GM and Visa
Can any of the company-specific risk be diversified away by investing in both GM and Visa 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 Visa into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between General Motors and Visa Class A, you can compare the effects of market volatilities on GM and Visa 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 Visa. Check out your portfolio center. Please also check ongoing floating volatility patterns of GM and Visa.
Diversification Opportunities for GM and Visa
Weak diversification
The 3 months correlation between GM and Visa is 0.32. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Visa Class A in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Visa Class A 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 Visa. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Visa Class A has no effect on the direction of GM i.e., GM and Visa go up and down completely randomly.
Pair Corralation between GM and Visa
Allowing for the 90-day total investment horizon General Motors is expected to generate 2.22 times more return on investment than Visa. However, GM is 2.22 times more volatile than Visa Class A. It trades about 0.11 of its potential returns per unit of risk. Visa Class A is currently generating about 0.09 per unit of risk. If you would invest 3,284 in General Motors on January 24, 2024 and sell it today you would earn a total of 1,226 from holding General Motors or generate 37.33% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
General Motors vs. Visa Class A
Performance |
| Timeline |
| General Motors |
| Visa Class A |
GM and Visa Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with GM and Visa
The main advantage of trading using opposite GM and Visa positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if GM position performs unexpectedly, Visa 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 Visa will offset losses from the drop in Visa's long position.The idea behind General Motors and Visa Class A 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.| Visa vs. American Express | Visa vs. Capital One Financial | Visa vs. Upstart HoldingsInc | Visa vs. Ally Financial |
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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