Correlation Between Volkswagen and British American

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

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

Diversification Opportunities for Volkswagen and British American

-0.48

Correlation Coefficient

Volkswagen  British American

Very good diversification

The 3 months correlation between Volkswagen and British is -0.48. Overlapping area represents the amount of risk that can be diversified away by holding Volkswagen AG and British American Tobacco in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on British American Tobacco and Volkswagen 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 Volkswagen AG are associated (or correlated) with British American. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of British American Tobacco has no effect on the direction of Volkswagen i.e., Volkswagen and British American go up and down completely randomly.

Pair Corralation between Volkswagen and British American

Assuming the 90 days trading horizon Volkswagen AG is expected to generate 1.25 times more return on investment than British American. However, Volkswagen is 1.25 times more volatile than British American Tobacco. It trades about 0.25 of its potential returns per unit of risk. British American Tobacco is currently generating about 0.01 per unit of risk. If you would invest  8,466  in Volkswagen AG on October 25, 2024 and sell it today you would earn a total of  1,242  from holding Volkswagen AG or generate 14.67% return on investment over 90 days.

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

Volkswagen AG  vs.  British American Tobacco

Volkswagen AG

Risk-Adjusted Performance

0 of 100

Very Weak

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

British American Tobacco

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in British American Tobacco are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, British American may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Volkswagen and British American

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

The idea behind Volkswagen AG and British American Tobacco 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.