Correlation Between Allison Transmission and BorgWarner

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

By analyzing existing cross correlation between Allison Transmission Holdings and BorgWarner, you can compare the effects of market volatilities on Allison Transmission and BorgWarner 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 Allison Transmission with a short position of BorgWarner. Check out your portfolio center. Please also check ongoing floating volatility patterns of Allison Transmission and BorgWarner.

Diversification Opportunities for Allison Transmission and BorgWarner

0.83

Correlation Coefficient

Allison Transmission  BorgWarner

Very poor diversification

The 3 months correlation between Allison and BorgWarner is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Allison Transmission Holdings and BorgWarner in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BorgWarner and Allison Transmission 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 Allison Transmission Holdings are associated (or correlated) with BorgWarner. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BorgWarner has no effect on the direction of Allison Transmission i.e., Allison Transmission and BorgWarner go up and down completely randomly.

Pair Corralation between Allison Transmission and BorgWarner

Given the investment horizon of 90 days Allison Transmission Holdings is expected to generate 1.27 times more return on investment than BorgWarner. However, Allison Transmission is 1.27 times more volatile than BorgWarner. It trades about -0.07 of its potential returns per unit of risk. BorgWarner is currently generating about -0.09 per unit of risk. If you would invest  10,774  in Allison Transmission Holdings on December 30, 2024 and sell it today you would lose (1,168) from holding Allison Transmission Holdings or give up 10.84% of portfolio value over 90 days.

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

Allison Transmission Holdings  vs.  BorgWarner

Allison Transmission

Risk-Adjusted Performance

Very Weak

Over the last 90 days Allison Transmission Holdings has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's basic indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

BorgWarner

Risk-Adjusted Performance

Very Weak

Over the last 90 days BorgWarner has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with Allison Transmission and BorgWarner

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

The idea behind Allison Transmission Holdings and BorgWarner 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 Stock Screener module to find equities using a custom stock filter or screen asymmetry in trading patterns, price, volume, or investment outlook..