Correlation Between GM and Severn Trent

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

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

Diversification Opportunities for GM and Severn Trent

-0.59

Correlation Coefficient

GM  Severn Trent

Excellent diversification

The 3 months correlation between GM and Severn is -0.59. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Severn Trent PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Severn Trent PLC 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 Severn Trent. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Severn Trent PLC has no effect on the direction of GM i.e., GM and Severn Trent go up and down completely randomly.

Pair Corralation between GM and Severn Trent

Allowing for the 90-day total investment horizon General Motors is expected to generate 1.33 times more return on investment than Severn Trent. However, GM is 1.33 times more volatile than Severn Trent PLC. It trades about 0.07 of its potential returns per unit of risk. Severn Trent PLC is currently generating about -0.01 per unit of risk. If you would invest  3,254  in General Motors on January 20, 2024 and sell it today you would earn a total of  990.00  from holding General Motors or generate 30.42% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	99.6%
Values	Daily Returns

General Motors  vs.  Severn Trent PLC

General Motors

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in General Motors are ranked lower than 14 (%) 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.

Severn Trent PLC

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Severn Trent PLC has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Severn Trent is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with GM and Severn Trent

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

The idea behind General Motors and Severn Trent PLC 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 Share Portfolio module to track or share privately all of your investments from the convenience of any device.