Correlation Between British American and Chesapeake Utilities

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

Diversification Opportunities for British American and Chesapeake Utilities

-0.04

Correlation Coefficient

British American  Chesapeake Utilities

Good diversification

The 3 months correlation between British and Chesapeake is -0.04. Overlapping area represents the amount of risk that can be diversified away by holding British American Tobacco and Chesapeake Utilities in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Chesapeake Utilities 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 Chesapeake Utilities. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Chesapeake Utilities has no effect on the direction of British American i.e., British American and Chesapeake Utilities go up and down completely randomly.

Pair Corralation between British American and Chesapeake Utilities

Assuming the 90 days trading horizon British American Tobacco is expected to generate 1.29 times more return on investment than Chesapeake Utilities. However, British American is 1.29 times more volatile than Chesapeake Utilities. It trades about 0.07 of its potential returns per unit of risk. Chesapeake Utilities is currently generating about -0.04 per unit of risk. If you would invest  3,538  in British American Tobacco on December 2, 2024 and sell it today you would earn a total of  206.00  from holding British American Tobacco or generate 5.82% return on investment over 90 days.

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

British American Tobacco  vs.  Chesapeake Utilities

British American Tobacco

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in British American Tobacco are ranked lower than 5 (%) 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 April 2025.

Chesapeake Utilities

Risk-Adjusted Performance

Very Weak

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

Pair Trading with British American and Chesapeake Utilities

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

The idea behind British American Tobacco and Chesapeake Utilities 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.