Correlation Between British American and Gap

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

Diversification Opportunities for British American and Gap

0.88

Correlation Coefficient

British American  Gap

Very poor diversification

The 3 months correlation between British and Gap is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding British American Tobacco and The Gap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Gap 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 Gap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Gap has no effect on the direction of British American i.e., British American and Gap go up and down completely randomly.

Pair Corralation between British American and Gap

Assuming the 90 days trading horizon British American Tobacco is expected to generate 0.34 times more return on investment than Gap. However, British American Tobacco is 2.92 times less risky than Gap. It trades about 0.07 of its potential returns per unit of risk. The Gap is currently generating about -0.21 per unit of risk. If you would invest  3,538  in British American Tobacco on October 9, 2024 and sell it today you would earn a total of  29.00  from holding British American Tobacco or generate 0.82% return on investment over 90 days.

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

British American Tobacco  vs.  The Gap

British American Tobacco

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in British American Tobacco are ranked lower than 16 (%) 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 February 2025.

Gap

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in The Gap are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Gap reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with British American and Gap

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

The idea behind British American Tobacco and The Gap 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .