Correlation Between British American and Volkswagen

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

By analyzing existing cross correlation between British American Tobacco and Volkswagen AG Non Vtg, you can compare the effects of market volatilities on British American and Volkswagen 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 British American with a short position of Volkswagen. Check out your portfolio center. Please also check ongoing floating volatility patterns of British American and Volkswagen.

Diversification Opportunities for British American and Volkswagen

0.57

Correlation Coefficient

British American  Volkswagen

Very weak diversification

The 3 months correlation between British and Volkswagen is 0.57. Overlapping area represents the amount of risk that can be diversified away by holding British American Tobacco and Volkswagen AG Non Vtg in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Volkswagen AG Non and British American 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 British American Tobacco are associated (or correlated) with Volkswagen. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Volkswagen AG Non has no effect on the direction of British American i.e., British American and Volkswagen go up and down completely randomly.

Pair Corralation between British American and Volkswagen

Assuming the 90 days trading horizon British American is expected to generate 1.24 times less return on investment than Volkswagen. But when comparing it to its historical volatility, British American Tobacco is 1.29 times less risky than Volkswagen. It trades about 0.12 of its potential returns per unit of risk. Volkswagen AG Non Vtg is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  8,845  in Volkswagen AG Non Vtg on December 25, 2024 and sell it today you would earn a total of  1,325  from holding Volkswagen AG Non Vtg or generate 14.98% return on investment over 90 days.

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

British American Tobacco  vs.  Volkswagen AG Non Vtg

British American Tobacco

Risk-Adjusted Performance

OK

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

Volkswagen AG Non

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Volkswagen AG Non Vtg are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Volkswagen unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with British American and Volkswagen

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

The idea behind British American Tobacco and Volkswagen AG Non Vtg 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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.