Correlation Between British American and Verizon Communications

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

Diversification Opportunities for British American and Verizon Communications

-0.28

Correlation Coefficient

British American  Verizon Communications

Very good diversification

The 3 months correlation between British and Verizon is -0.28. Overlapping area represents the amount of risk that can be diversified away by holding British American Tobacco and Verizon Communications in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Verizon Communications 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 Verizon Communications. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Verizon Communications has no effect on the direction of British American i.e., British American and Verizon Communications go up and down completely randomly.

Pair Corralation between British American and Verizon Communications

Assuming the 90 days trading horizon British American is expected to generate 1.06 times less return on investment than Verizon Communications. In addition to that, British American is 1.11 times more volatile than Verizon Communications. It trades about 0.05 of its total potential returns per unit of risk. Verizon Communications is currently generating about 0.06 per unit of volatility. If you would invest  2,919  in Verizon Communications on December 2, 2024 and sell it today you would earn a total of  1,304  from holding Verizon Communications or generate 44.67% return on investment over 90 days.

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

British American Tobacco  vs.  Verizon Communications

British American Tobacco

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in British American Tobacco are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, British American is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Verizon Communications

Risk-Adjusted Performance

Very Weak

Over the last 90 days Verizon Communications has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Verizon Communications is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with British American and Verizon Communications

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

The idea behind British American Tobacco and Verizon Communications 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 Center module to all portfolio management and optimization tools to improve performance of your portfolios.