Correlation Between British American and Warner Music

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

Diversification Opportunities for British American and Warner Music

0.3

Correlation Coefficient

British American  Warner Music

Weak diversification

The 3 months correlation between British and Warner is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding British American Tobacco and Warner Music Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Warner Music Group 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 Warner Music. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Warner Music Group has no effect on the direction of British American i.e., British American and Warner Music go up and down completely randomly.

Pair Corralation between British American and Warner Music

Assuming the 90 days trading horizon British American is expected to generate 3.13 times less return on investment than Warner Music. But when comparing it to its historical volatility, British American Tobacco is 1.22 times less risky than Warner Music. It trades about 0.09 of its potential returns per unit of risk. Warner Music Group is currently generating about 0.22 of returns per unit of risk over similar time horizon. If you would invest  3,950  in Warner Music Group on September 11, 2024 and sell it today you would earn a total of  895.00  from holding Warner Music Group or generate 22.66% return on investment over 90 days.

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

British American Tobacco  vs.  Warner Music Group

British American Tobacco

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in British American Tobacco are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, British American may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Warner Music Group

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Warner Music Group are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak primary indicators, Warner Music sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with British American and Warner Music

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

The idea behind British American Tobacco and Warner Music Group 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.