Correlation Between BAE Systems and Lockheed Martin

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

Diversification Opportunities for BAE Systems and Lockheed Martin

0.24

Correlation Coefficient

BAE Systems  Lockheed Martin

Modest diversification

The 3 months correlation between BAE and Lockheed is 0.24. Overlapping area represents the amount of risk that can be diversified away by holding BAE Systems PLC and Lockheed Martin in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lockheed Martin 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 Lockheed Martin. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lockheed Martin has no effect on the direction of BAE Systems i.e., BAE Systems and Lockheed Martin go up and down completely randomly.

Pair Corralation between BAE Systems and Lockheed Martin

Assuming the 90 days horizon BAE Systems PLC is expected to under-perform the Lockheed Martin. In addition to that, BAE Systems is 1.28 times more volatile than Lockheed Martin. It trades about -0.07 of its total potential returns per unit of risk. Lockheed Martin is currently generating about -0.07 per unit of volatility. If you would invest  56,722  in Lockheed Martin on September 3, 2024 and sell it today you would lose (3,781) from holding Lockheed Martin or give up 6.67% of portfolio value over 90 days.

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

BAE Systems PLC  vs.  Lockheed Martin

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 fragile performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Lockheed Martin

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with BAE Systems and Lockheed Martin

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

The idea behind BAE Systems PLC and Lockheed Martin 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 ETFs module to find actively traded Exchange Traded Funds (ETF) from around the world.