Correlation Between BAE Systems and London Stock

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

Diversification Opportunities for BAE Systems and London Stock

-0.46

Correlation Coefficient

BAE Systems  London Stock

Very good diversification

The 3 months correlation between BAE and London is -0.46. Overlapping area represents the amount of risk that can be diversified away by holding BAE Systems plc and London Stock Exchange in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on London Stock Exchange 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 London Stock. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of London Stock Exchange has no effect on the direction of BAE Systems i.e., BAE Systems and London Stock go up and down completely randomly.

Pair Corralation between BAE Systems and London Stock

Assuming the 90 days trading horizon BAE Systems is expected to generate 2.77 times less return on investment than London Stock. In addition to that, BAE Systems is 1.59 times more volatile than London Stock Exchange. It trades about 0.03 of its total potential returns per unit of risk. London Stock Exchange is currently generating about 0.14 per unit of volatility. If you would invest  820,797  in London Stock Exchange on October 1, 2024 and sell it today you would earn a total of  312,203  from holding London Stock Exchange or generate 38.04% return on investment over 90 days.

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

BAE Systems plc  vs.  London Stock Exchange

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.

London Stock Exchange

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in London Stock Exchange are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unsteady basic indicators, London Stock may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with BAE Systems and London Stock

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

The idea behind BAE Systems plc and London Stock Exchange 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.