Correlation Between GM and Forestar

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

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

Diversification Opportunities for GM and Forestar

0.52

Correlation Coefficient

GM  Forestar

Very weak diversification

The 3 months correlation between GM and Forestar is 0.52. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Forestar Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Forestar Group 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 Forestar. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Forestar Group has no effect on the direction of GM i.e., GM and Forestar go up and down completely randomly.

Pair Corralation between GM and Forestar

Allowing for the 90-day total investment horizon General Motors is expected to generate 1.97 times more return on investment than Forestar. However, GM is 1.97 times more volatile than Forestar Group. It trades about 0.27 of its potential returns per unit of risk. Forestar Group is currently generating about -0.06 per unit of risk. If you would invest  4,484  in General Motors on August 1, 2024 and sell it today you would earn a total of  670.00  from holding General Motors or generate 14.94% return on investment over 90 days.

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

General Motors  vs.  Forestar Group

General Motors

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in General Motors are ranked lower than 10 (%) 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.

Forestar Group

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Forestar Group are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable basic indicators, Forestar is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with GM and Forestar

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

The idea behind General Motors and Forestar Group 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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.