Correlation Between Honda and GM

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

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

Diversification Opportunities for Honda and GM

0.92

Correlation Coefficient

Honda  GM

Almost no diversification

The 3 months correlation between Honda and GM is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding Honda Motor Co and General Motors in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on General Motors and Honda 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 Honda Motor Co 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 Honda i.e., Honda and GM go up and down completely randomly.

Pair Corralation between Honda and GM

Considering the 90-day investment horizon Honda Motor Co is expected to generate 0.66 times more return on investment than GM. However, Honda Motor Co is 1.52 times less risky than GM. It trades about 0.07 of its potential returns per unit of risk. General Motors is currently generating about 0.04 per unit of risk. If you would invest  2,363  in Honda Motor Co on January 19, 2024 and sell it today you would earn a total of  1,109  from holding Honda Motor Co or generate 46.93% return on investment over 90 days.

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

Honda Motor Co  vs.  General Motors

Honda Motor

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Honda Motor Co are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of rather unfluctuating primary indicators, Honda may actually be approaching a critical reversion point that can send shares even higher in May 2024.

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.

Pair Trading with Honda and GM

The main advantage of trading using opposite Honda and GM positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Honda 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 Honda Motor Co 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..