Correlation Between GM and Federal Signal

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

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

Diversification Opportunities for GM and Federal Signal

0.13

Correlation Coefficient

GM  Federal Signal

Average diversification

The 3 months correlation between GM and Federal is 0.13. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Federal Signal in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Federal Signal 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 Federal Signal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Federal Signal has no effect on the direction of GM i.e., GM and Federal Signal go up and down completely randomly.

Pair Corralation between GM and Federal Signal

Allowing for the 90-day total investment horizon GM is expected to generate 1.09 times less return on investment than Federal Signal. In addition to that, GM is 1.14 times more volatile than Federal Signal. It trades about 0.05 of its total potential returns per unit of risk. Federal Signal is currently generating about 0.07 per unit of volatility. If you would invest  6,301  in Federal Signal on September 30, 2024 and sell it today you would earn a total of  2,965  from holding Federal Signal or generate 47.06% return on investment over 90 days.

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

General Motors  vs.  Federal Signal

General Motors

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in General Motors are ranked lower than 11 (%) 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.

Federal Signal

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Federal Signal has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Federal Signal is not utilizing all of its potentials. The recent stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with GM and Federal Signal

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

The idea behind General Motors and Federal Signal 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.