Correlation Between GM and DAX

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Can any of the company-specific risk be diversified away by investing in both GM and DAX 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 DAX into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between General Motors and DAX, you can compare the effects of market volatilities on GM and DAX 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 DAX. Check out your portfolio center. Please also check ongoing floating volatility patterns of GM and DAX.

Diversification Opportunities for GM and DAX

0.69
  Correlation Coefficient

Poor diversification

The 3 months correlation between GM and DAX is 0.69. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and DAX in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DAX 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 DAX. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DAX has no effect on the direction of GM i.e., GM and DAX go up and down completely randomly.
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Pair Corralation between GM and DAX

Allowing for the 90-day total investment horizon General Motors is expected to generate 1.76 times more return on investment than DAX. However, GM is 1.76 times more volatile than DAX. It trades about 0.01 of its potential returns per unit of risk. DAX is currently generating about -0.02 per unit of risk. If you would invest  4,370  in General Motors on August 30, 2022 and sell it today you would lose (324.00)  from holding General Motors or give up 7.41% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy53.12%
ValuesDaily Returns

General Motors  vs.  DAX

 Performance (%) 
       Timeline  

GM and DAX Volatility Contrast

   Predicted Return Density   
       Returns  

DAX

Pair trading matchups for DAX

The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against DAX as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. DAX's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, DAX's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to DAX.

Pair Trading with GM and DAX

The main advantage of trading using opposite GM and DAX positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if GM position performs unexpectedly, DAX 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 DAX will offset losses from the drop in DAX's long position.
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The idea behind General Motors and DAX 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.
The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against DAX as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. DAX's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, DAX's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to DAX.
Check out your portfolio center. 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 Insider Screener module to find insiders across different sectors to evaluate their impact on performance.

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