Correlation Between GM and Northern Oil

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

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

Diversification Opportunities for GM and Northern Oil

0.7

Correlation Coefficient

GM Northern Oil

Poor diversification

The 3 months correlation between GM and Northern is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Northern Oil Gas in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Oil Gas 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 Northern Oil. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northern Oil Gas has no effect on the direction of GM i.e., GM and Northern Oil go up and down completely randomly.

Pair Corralation between GM and Northern Oil

Allowing for the 90-day total investment horizon General Motors is expected to under-perform the Northern Oil. But the stock apears to be less risky and, when comparing its historical volatility, General Motors is 1.2 times less risky than Northern Oil. The stock trades about -0.12 of its potential returns per unit of risk. The Northern Oil Gas is currently generating about -0.07 of returns per unit of risk over similar time horizon. If you would invest  3,220  in Northern Oil Gas on January 1, 2023 and sell it today you would lose (185.00)  from holding Northern Oil Gas or give up 5.75% of portfolio value over 90 days.

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

General Motors  vs.  Northern Oil Gas

General Motors

GM Performance

4 of 100

Compared to the overall equity markets, risk-adjusted returns on investments in General Motors are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of very unsteady primary indicators, GM may actually be approaching a critical reversion point that can send shares even higher in May 2023.

Northern Oil Gas

Northern Performance

3 of 100

Compared to the overall equity markets, risk-adjusted returns on investments in Northern Oil Gas are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite nearly inconsistent basic indicators, Northern Oil may actually be approaching a critical reversion point that can send shares even higher in May 2023.

Pair Trading with GM and Northern Oil

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

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The idea behind General Motors and Northern Oil Gas 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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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 Portfolio Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.