Correlation Between BAE Systems and General Dynamics

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

Diversification Opportunities for BAE Systems and General Dynamics

0.88

Correlation Coefficient

BAE Systems  General Dynamics

Very poor diversification

The 3 months correlation between BAE and General is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding BAE Systems PLC and General Dynamics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on General Dynamics 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 General Dynamics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of General Dynamics has no effect on the direction of BAE Systems i.e., BAE Systems and General Dynamics go up and down completely randomly.

Pair Corralation between BAE Systems and General Dynamics

Assuming the 90 days horizon BAE Systems PLC is expected to generate 1.68 times more return on investment than General Dynamics. However, BAE Systems is 1.68 times more volatile than General Dynamics. It trades about -0.07 of its potential returns per unit of risk. General Dynamics is currently generating about -0.13 per unit of risk. If you would invest  1,630  in BAE Systems PLC on September 30, 2024 and sell it today you would lose (192.00) from holding BAE Systems PLC or give up 11.78% of portfolio value over 90 days.

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

BAE Systems PLC  vs.  General Dynamics

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. Despite latest weak 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.

General Dynamics

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with BAE Systems and General Dynamics

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

The idea behind BAE Systems PLC and General Dynamics 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.