Correlation Between ABSA Bank and BHP Group

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

By analyzing existing cross correlation between ABSA Bank Limited and BHP Group Limited, you can compare the effects of market volatilities on ABSA Bank and BHP Group 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 ABSA Bank with a short position of BHP Group. Check out your portfolio center. Please also check ongoing floating volatility patterns of ABSA Bank and BHP Group.

Diversification Opportunities for ABSA Bank and BHP Group

-0.77

Correlation Coefficient

ABSA Bank  BHP Group

Pay attention - limited upside

The 3 months correlation between ABSA and BHP is -0.77. Overlapping area represents the amount of risk that can be diversified away by holding ABSA Bank Limited and BHP Group Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BHP Group Limited and ABSA Bank 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 ABSA Bank Limited are associated (or correlated) with BHP Group. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BHP Group Limited has no effect on the direction of ABSA Bank i.e., ABSA Bank and BHP Group go up and down completely randomly.

Pair Corralation between ABSA Bank and BHP Group

Assuming the 90 days trading horizon ABSA Bank Limited is expected to generate 0.66 times more return on investment than BHP Group. However, ABSA Bank Limited is 1.51 times less risky than BHP Group. It trades about 0.02 of its potential returns per unit of risk. BHP Group Limited is currently generating about -0.07 per unit of risk. If you would invest  8,650,000  in ABSA Bank Limited on September 29, 2024 and sell it today you would earn a total of  27,700  from holding ABSA Bank Limited or generate 0.32% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	95.0%
Values	Daily Returns

ABSA Bank Limited  vs.  BHP Group Limited

ABSA Bank Limited

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in ABSA Bank Limited are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable basic indicators, ABSA Bank is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

BHP Group Limited

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days BHP Group Limited has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unsteady performance in the last few months, the Stock's technical and fundamental indicators remain rather sound which may send shares a bit higher in January 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Pair Trading with ABSA Bank and BHP Group

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

The idea behind ABSA Bank Limited and BHP Group Limited 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.