Correlation Between GM and Honda

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Can any of the company-specific risk be diversified away by investing in both GM and Honda 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 Honda into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between General Motors and Honda Motor Co, you can compare the effects of market volatilities on GM and Honda 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 Honda. Check out your portfolio center. Please also check ongoing floating volatility patterns of GM and Honda.

Diversification Opportunities for GM and Honda

0.92
  Correlation Coefficient

Almost no diversification

The 3 months correlation between GM and Honda is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Honda Motor Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Honda Motor 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 Honda. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Honda Motor has no effect on the direction of GM i.e., GM and Honda go up and down completely randomly.

Pair Corralation between GM and Honda

Allowing for the 90-day total investment horizon General Motors is expected to generate 1.35 times more return on investment than Honda. However, GM is 1.35 times more volatile than Honda Motor Co. It trades about 0.33 of its potential returns per unit of risk. Honda Motor Co is currently generating about 0.21 per unit of risk. If you would invest  4,006  in General Motors on December 29, 2023 and sell it today you would earn a total of  453.00  from holding General Motors or generate 11.31% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Strong
Accuracy95.65%
ValuesDaily Returns

General Motors  vs.  Honda Motor Co

 Performance 
       Timeline  
General Motors 

Risk-Adjusted Performance

17 of 100

 
Low
 
High
Solid
Compared to the overall equity markets, risk-adjusted returns on investments in General Motors are ranked lower than 17 (%) 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.
Honda Motor 

Risk-Adjusted Performance

20 of 100

 
Low
 
High
Solid
Compared to the overall equity markets, risk-adjusted returns on investments in Honda Motor Co are ranked lower than 20 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak primary indicators, Honda exhibited solid returns over the last few months and may actually be approaching a breakup point.

GM and Honda Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with GM and Honda

The main advantage of trading using opposite GM and Honda positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if GM position performs unexpectedly, Honda 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 Honda will offset losses from the drop in Honda's long position.
The idea behind General Motors and Honda Motor Co 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 Earnings Calls module to check upcoming earnings announcements updated hourly across public exchanges.

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