Correlation Between GM and China Foods

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

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

Diversification Opportunities for GM and China Foods

0.4

Correlation Coefficient

GM  China Foods

Very weak diversification

The 3 months correlation between GM and China is 0.4. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and China Foods Ltd in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Foods 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 China Foods. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Foods has no effect on the direction of GM i.e., GM and China Foods go up and down completely randomly.

Pair Corralation between GM and China Foods

Allowing for the 90-day total investment horizon General Motors is expected to under-perform the China Foods. But the stock apears to be less risky and, when comparing its historical volatility, General Motors is 1.03 times less risky than China Foods. The stock trades about -0.02 of its potential returns per unit of risk. The China Foods Ltd is currently generating about 0.22 of returns per unit of risk over similar time horizon. If you would invest  722.00  in China Foods Ltd on January 24, 2024 and sell it today you would earn a total of  43.00  from holding China Foods Ltd or generate 5.96% return on investment over 90 days.

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

General Motors  vs.  China Foods Ltd

General Motors

Risk-Adjusted Performance

17 of 100

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.

China Foods

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in China Foods Ltd are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak technical indicators, China Foods may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Pair Trading with GM and China Foods

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

The idea behind General Motors and China Foods Ltd 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 Portfolio Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.