Correlation Between BAE Systems and Diageo PLC

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

By analyzing existing cross correlation between BAE Systems plc and Diageo PLC, you can compare the effects of market volatilities on BAE Systems and Diageo PLC 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 BAE Systems with a short position of Diageo PLC. Check out your portfolio center. Please also check ongoing floating volatility patterns of BAE Systems and Diageo PLC.

Diversification Opportunities for BAE Systems and Diageo PLC

-0.3

Correlation Coefficient

BAE Systems  Diageo PLC

Very good diversification

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

Pair Corralation between BAE Systems and Diageo PLC

Assuming the 90 days trading horizon BAE Systems plc is expected to generate 0.96 times more return on investment than Diageo PLC. However, BAE Systems plc is 1.04 times less risky than Diageo PLC. It trades about 0.03 of its potential returns per unit of risk. Diageo PLC is currently generating about -0.04 per unit of risk. If you would invest  105,146  in BAE Systems plc on October 1, 2024 and sell it today you would earn a total of  10,404  from holding BAE Systems plc or generate 9.89% return on investment over 90 days.

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

BAE Systems plc  vs.  Diageo PLC

BAE Systems plc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days BAE Systems plc has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Stock's basic indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Diageo PLC

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Diageo PLC has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound technical and fundamental indicators, Diageo PLC is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with BAE Systems and Diageo PLC

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

The idea behind BAE Systems plc and Diageo PLC 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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.