Correlation Between Bank of America and BASF SE

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

By analyzing existing cross correlation between Verizon Communications and BASF SE, you can compare the effects of market volatilities on Bank of America and BASF SE 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 Bank of America with a short position of BASF SE. Check out your portfolio center. Please also check ongoing floating volatility patterns of Bank of America and BASF SE.

Diversification Opportunities for Bank of America and BASF SE

-0.08

Correlation Coefficient

Bank of America  BASF SE

Good diversification

The 3 months correlation between Bank and BASF is -0.08. Overlapping area represents the amount of risk that can be diversified away by holding Verizon Communications and BASF SE in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BASF SE and Bank of America 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 Verizon Communications are associated (or correlated) with BASF SE. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BASF SE has no effect on the direction of Bank of America i.e., Bank of America and BASF SE go up and down completely randomly.

Pair Corralation between Bank of America and BASF SE

Assuming the 90 days trading horizon Verizon Communications is expected to under-perform the BASF SE. But the stock apears to be less risky and, when comparing its historical volatility, Verizon Communications is 1.76 times less risky than BASF SE. The stock trades about -0.25 of its potential returns per unit of risk. The BASF SE is currently generating about -0.14 of returns per unit of risk over similar time horizon. If you would invest  1,110  in BASF SE on October 13, 2024 and sell it today you would lose (70.00) from holding BASF SE or give up 6.31% of portfolio value over 90 days.

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

Verizon Communications  vs.  BASF SE

Verizon Communications

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Verizon Communications has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable fundamental indicators, Bank of America is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

BASF SE

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Bank of America and BASF SE

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

The idea behind Verizon Communications and BASF SE 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.