Correlation Between Brown Forman and Constellation Brands

Can any of the company-specific risk be diversified away by investing in both Brown Forman and Constellation Brands 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 Brown Forman and Constellation Brands into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Brown Forman and Constellation Brands, you can compare the effects of market volatilities on Brown Forman and Constellation Brands 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 Brown Forman with a short position of Constellation Brands. Check out your portfolio center. Please also check ongoing floating volatility patterns of Brown Forman and Constellation Brands.

Diversification Opportunities for Brown Forman and Constellation Brands

0.35

Correlation Coefficient

Brown Forman  Constellation Brands

Weak diversification

The 3 months correlation between Brown and Constellation is 0.35. Overlapping area represents the amount of risk that can be diversified away by holding Brown Forman and Constellation Brands in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Constellation Brands and Brown Forman 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 Brown Forman are associated (or correlated) with Constellation Brands. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Constellation Brands has no effect on the direction of Brown Forman i.e., Brown Forman and Constellation Brands go up and down completely randomly.

Pair Corralation between Brown Forman and Constellation Brands

Assuming the 90 days trading horizon Brown Forman is expected to generate 0.46 times more return on investment than Constellation Brands. However, Brown Forman is 2.19 times less risky than Constellation Brands. It trades about -0.76 of its potential returns per unit of risk. Constellation Brands is currently generating about -0.35 per unit of risk. If you would invest  4,308  in Brown Forman on October 16, 2024 and sell it today you would lose (920.00) from holding Brown Forman or give up 21.36% of portfolio value over 90 days.

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

Brown Forman  vs.  Constellation Brands

Brown Forman

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Brown Forman has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Constellation Brands

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Constellation Brands has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with Brown Forman and Constellation Brands

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

The idea behind Brown Forman and Constellation Brands 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.