Can any of the company-specific risk be diversified away by investing in both General Electric and Capstone Green 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 General Electric and Capstone Green into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between General Electric and Capstone Green Energy, you can compare the effects of market volatilities on General Electric and Capstone Green 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 General Electric with a short position of Capstone Green. Check out your portfolio center. Please also check ongoing floating volatility patterns of General Electric and Capstone Green.
Diversification Opportunities for General Electric and Capstone Green
The 3 months correlation between General and Capstone is -0.27. Overlapping area represents the amount of risk that can be diversified away by holding General Electric and Capstone Green Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Capstone Green Energy and General Electric 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 Electric are associated (or correlated) with Capstone Green. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Capstone Green Energy has no effect on the direction of General Electric i.e., General Electric and Capstone Green go up and down completely randomly.
Pair Corralation between General Electric and Capstone Green
Allowing for the 90-day total investment horizon General Electric is expected to generate 0.08 times more return on investment than Capstone Green. However, General Electric is 12.92 times less risky than Capstone Green. It trades about -0.17 of its potential returns per unit of risk. Capstone Green Energy is currently generating about -0.15 per unit of risk. If you would invest 11,280 in General Electric on July 6, 2023 and sell it today you would lose (504.00) from holding General Electric or give up 4.47% of portfolio value over 90 days.
Over the last 90 days General Electric has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound technical and fundamental indicators, General Electric is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.
Over the last 90 days Capstone Green Energy has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of abnormal performance in the last few months, the Stock's basic indicators remain very healthy which may send shares a bit higher in November 2023. The recent disarray may also be a sign of long period up-swing for the firm insiders.
General Electric and Capstone Green Volatility Contrast
Predicted Return Density
Pair Trading with General Electric and Capstone Green
The main advantage of trading using opposite General Electric and Capstone Green positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if General Electric position performs unexpectedly, Capstone Green 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 Capstone Green will offset losses from the drop in Capstone Green's long position.
The idea behind General Electric and Capstone Green Energy 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.
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