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

0.19

Correlation Coefficient

BAE Systems  General Dynamics

Average diversification

The 3 months correlation between BAE and General is 0.19. 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 2.36 times more return on investment than General Dynamics. However, BAE Systems is 2.36 times more volatile than General Dynamics. It trades about 0.19 of its potential returns per unit of risk. General Dynamics is currently generating about 0.03 per unit of risk. If you would invest  5,814  in BAE Systems PLC on December 27, 2024 and sell it today you would earn a total of  2,421  from holding BAE Systems PLC or generate 41.64% return on investment over 90 days.

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

BAE Systems PLC  vs.  General Dynamics

BAE Systems PLC

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in BAE Systems PLC are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile basic indicators, BAE Systems showed solid returns over the last few months and may actually be approaching a breakup point.

General Dynamics

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in General Dynamics are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound fundamental indicators, General Dynamics 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 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.