Correlation Between GE Aerospace and Allison Transmission

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

By analyzing existing cross correlation between GE Aerospace and Allison Transmission Holdings, you can compare the effects of market volatilities on GE Aerospace and Allison Transmission 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 GE Aerospace with a short position of Allison Transmission. Check out your portfolio center. Please also check ongoing floating volatility patterns of GE Aerospace and Allison Transmission.

Diversification Opportunities for GE Aerospace and Allison Transmission

0.85

Correlation Coefficient

GE Aerospace  Allison Transmission

Very poor diversification

The 3 months correlation between GE Aerospace and Allison is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding GE Aerospace and Allison Transmission Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Allison Transmission and GE Aerospace 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 GE Aerospace are associated (or correlated) with Allison Transmission. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Allison Transmission has no effect on the direction of GE Aerospace i.e., GE Aerospace and Allison Transmission go up and down completely randomly.

Pair Corralation between GE Aerospace and Allison Transmission

Allowing for the 90-day total investment horizon GE Aerospace is expected to generate 0.89 times more return on investment than Allison Transmission. However, GE Aerospace is 1.12 times less risky than Allison Transmission. It trades about 0.31 of its potential returns per unit of risk. Allison Transmission Holdings is currently generating about 0.16 per unit of risk. If you would invest  8,666  in GE Aerospace on February 1, 2024 and sell it today you would earn a total of  7,516  from holding GE Aerospace or generate 86.73% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	100.0%
Values	Daily Returns

GE Aerospace  vs.  Allison Transmission Holdings

GE Aerospace

Risk-Adjusted Performance

25 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in GE Aerospace are ranked lower than 25 (%) of all global equities and portfolios over the last 90 days. In spite of rather abnormal technical and fundamental indicators, GE Aerospace exhibited solid returns over the last few months and may actually be approaching a breakup point.

Allison Transmission

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Allison Transmission Holdings are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of very weak basic indicators, Allison Transmission displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with GE Aerospace and Allison Transmission

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

The idea behind GE Aerospace and Allison Transmission Holdings 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.