Correlation Between BAE Systems and Transdigm Group

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

Diversification Opportunities for BAE Systems and Transdigm Group

0.32

Correlation Coefficient

BAE Systems  Transdigm Group

Weak diversification

The 3 months correlation between BAE and Transdigm is 0.32. Overlapping area represents the amount of risk that can be diversified away by holding BAE Systems PLC and Transdigm Group Incorporated in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Transdigm Group 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 Transdigm Group. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Transdigm Group has no effect on the direction of BAE Systems i.e., BAE Systems and Transdigm Group go up and down completely randomly.

Pair Corralation between BAE Systems and Transdigm Group

Assuming the 90 days horizon BAE Systems PLC is expected to generate 0.95 times more return on investment than Transdigm Group. However, BAE Systems PLC is 1.05 times less risky than Transdigm Group. It trades about -0.01 of its potential returns per unit of risk. Transdigm Group Incorporated is currently generating about -0.07 per unit of risk. If you would invest  6,455  in BAE Systems PLC on September 5, 2024 and sell it today you would lose (70.00) from holding BAE Systems PLC or give up 1.08% 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.  Transdigm Group Incorporated

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 fairly strong basic indicators, BAE Systems is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Transdigm Group

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Transdigm Group Incorporated has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable fundamental indicators, Transdigm Group is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with BAE Systems and Transdigm Group

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

The idea behind BAE Systems PLC and Transdigm Group Incorporated 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.

Check out your portfolio center.

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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.