Correlation Between GM and Independent Bank

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

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

Diversification Opportunities for GM and Independent Bank

-0.76

Correlation Coefficient

GM  Independent Bank

Pay attention - limited upside

The 3 months correlation between GM and Independent is -0.76. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Independent Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Independent Bank 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 Independent Bank. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Independent Bank has no effect on the direction of GM i.e., GM and Independent Bank go up and down completely randomly.

Pair Corralation between GM and Independent Bank

Allowing for the 90-day total investment horizon General Motors is expected to generate 1.03 times more return on investment than Independent Bank. However, GM is 1.03 times more volatile than Independent Bank. It trades about 0.05 of its potential returns per unit of risk. Independent Bank is currently generating about -0.03 per unit of risk. If you would invest  3,179  in General Motors on January 25, 2024 and sell it today you would earn a total of  1,329  from holding General Motors or generate 41.81% return on investment over 90 days.

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

General Motors  vs.  Independent Bank

General Motors

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in General Motors are ranked lower than 18 (%) 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.

Independent Bank

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Independent Bank has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest unfluctuating performance, the Stock's fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with GM and Independent Bank

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

The idea behind General Motors and Independent Bank 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.