Correlation Between Amazon and GM

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

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

Diversification Opportunities for Amazon and GM

0.89

Correlation Coefficient

Amazon  GM

Very poor diversification

The 3 months correlation between Amazon and GM is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Amazon Inc and General Motors in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on General Motors and Amazon 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 Amazon Inc are associated (or correlated) with GM. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of General Motors has no effect on the direction of Amazon i.e., Amazon and GM go up and down completely randomly.

Pair Corralation between Amazon and GM

Given the investment horizon of 90 days Amazon Inc is expected to under-perform the GM. But the stock apears to be less risky and, when comparing its historical volatility, Amazon Inc is 1.02 times less risky than GM. The stock trades about -0.05 of its potential returns per unit of risk. The General Motors is currently generating about -0.02 of returns per unit of risk over similar time horizon. If you would invest  4,355  in General Motors on January 24, 2024 and sell it today you would lose (34.00) from holding General Motors or give up 0.78% of portfolio value over 90 days.

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

Amazon Inc  vs.  General Motors

Amazon Inc

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Amazon Inc are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, Amazon displayed solid returns over the last few months and may actually be approaching a breakup point.

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 unsteady primary indicators, GM displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Amazon and GM

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

The idea behind Amazon Inc and General Motors 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.