Correlation Between BRITISH AMERICAN and AFRICAN DISTILLERS

Can any of the company-specific risk be diversified away by investing in both BRITISH AMERICAN and AFRICAN DISTILLERS 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 BRITISH AMERICAN and AFRICAN DISTILLERS into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between BRITISH AMERICAN TOBACCO and AFRICAN DISTILLERS LIMITED, you can compare the effects of market volatilities on BRITISH AMERICAN and AFRICAN DISTILLERS 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 BRITISH AMERICAN with a short position of AFRICAN DISTILLERS. Check out your portfolio center. Please also check ongoing floating volatility patterns of BRITISH AMERICAN and AFRICAN DISTILLERS.

Diversification Opportunities for BRITISH AMERICAN and AFRICAN DISTILLERS

0.55

Correlation Coefficient

BRITISH AMERICAN  AFRICAN DISTILLERS

Very weak diversification

The 3 months correlation between BRITISH and AFRICAN is 0.55. Overlapping area represents the amount of risk that can be diversified away by holding BRITISH AMERICAN TOBACCO and AFRICAN DISTILLERS LIMITED in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AFRICAN DISTILLERS and BRITISH AMERICAN 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 BRITISH AMERICAN TOBACCO are associated (or correlated) with AFRICAN DISTILLERS. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of AFRICAN DISTILLERS has no effect on the direction of BRITISH AMERICAN i.e., BRITISH AMERICAN and AFRICAN DISTILLERS go up and down completely randomly.

Pair Corralation between BRITISH AMERICAN and AFRICAN DISTILLERS

Assuming the 90 days trading horizon BRITISH AMERICAN TOBACCO is expected to generate 15.82 times more return on investment than AFRICAN DISTILLERS. However, BRITISH AMERICAN is 15.82 times more volatile than AFRICAN DISTILLERS LIMITED. It trades about 0.2 of its potential returns per unit of risk. AFRICAN DISTILLERS LIMITED is currently generating about 0.24 per unit of risk. If you would invest  786,580  in BRITISH AMERICAN TOBACCO on October 12, 2024 and sell it today you would earn a total of  139,420  from holding BRITISH AMERICAN TOBACCO or generate 17.72% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	94.74%
Values	Daily Returns

BRITISH AMERICAN TOBACCO  vs.  AFRICAN DISTILLERS LIMITED

BRITISH AMERICAN TOBACCO

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in BRITISH AMERICAN TOBACCO are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite fairly weak forward indicators, BRITISH AMERICAN demonstrated solid returns over the last few months and may actually be approaching a breakup point.

AFRICAN DISTILLERS

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in AFRICAN DISTILLERS LIMITED are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong fundamental indicators, AFRICAN DISTILLERS is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with BRITISH AMERICAN and AFRICAN DISTILLERS

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

The idea behind BRITISH AMERICAN TOBACCO and AFRICAN DISTILLERS LIMITED 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 Portfolio Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.