Correlation Between British American and Sparebank

Can any of the company-specific risk be diversified away by investing in both British American and Sparebank 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 Sparebank 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 Sparebank 1 SR, you can compare the effects of market volatilities on British American and Sparebank 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 Sparebank. Check out your portfolio center. Please also check ongoing floating volatility patterns of British American and Sparebank.

Diversification Opportunities for British American and Sparebank

-0.58

Correlation Coefficient

British American  Sparebank

Excellent diversification

The 3 months correlation between British and Sparebank is -0.58. Overlapping area represents the amount of risk that can be diversified away by holding British American Tobacco and Sparebank 1 SR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sparebank 1 SR 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 Sparebank. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sparebank 1 SR has no effect on the direction of British American i.e., British American and Sparebank go up and down completely randomly.

Pair Corralation between British American and Sparebank

Assuming the 90 days trading horizon British American is expected to generate 3.87 times less return on investment than Sparebank. But when comparing it to its historical volatility, British American Tobacco is 1.09 times less risky than Sparebank. It trades about 0.03 of its potential returns per unit of risk. Sparebank 1 SR is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  13,500  in Sparebank 1 SR on August 31, 2024 and sell it today you would earn a total of  980.00  from holding Sparebank 1 SR or generate 7.26% return on investment over 90 days.

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

British American Tobacco  vs.  Sparebank 1 SR

British American Tobacco

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in British American Tobacco are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable basic indicators, British American is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

Sparebank 1 SR

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Sparebank 1 SR are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unsteady basic indicators, Sparebank may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with British American and Sparebank

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

The idea behind British American Tobacco and Sparebank 1 SR 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.

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 the Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.