Correlation Between British American and Universal Insurance

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

Diversification Opportunities for British American and Universal Insurance

0.81

Correlation Coefficient

British American  Universal Insurance

Very poor diversification

The 3 months correlation between British and Universal is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding British American Tobacco and Universal Insurance Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Universal Insurance 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 Universal Insurance. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Universal Insurance has no effect on the direction of British American i.e., British American and Universal Insurance go up and down completely randomly.

Pair Corralation between British American and Universal Insurance

Assuming the 90 days trading horizon British American Tobacco is expected to generate 0.75 times more return on investment than Universal Insurance. However, British American Tobacco is 1.33 times less risky than Universal Insurance. It trades about -0.09 of its potential returns per unit of risk. Universal Insurance Holdings is currently generating about -0.32 per unit of risk. If you would invest  3,549  in British American Tobacco on October 1, 2024 and sell it today you would lose (47.00) from holding British American Tobacco or give up 1.32% of portfolio value over 90 days.

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

British American Tobacco  vs.  Universal Insurance Holdings

British American Tobacco

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in British American Tobacco are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, British American may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Universal Insurance

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Universal Insurance Holdings are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Universal Insurance is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with British American and Universal Insurance

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

The idea behind British American Tobacco and Universal Insurance Holdings 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 USA ETFs module to find actively traded Exchange Traded Funds (ETF) in USA.