Correlation Between British American and Mastercard Incorporated

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

Diversification Opportunities for British American and Mastercard Incorporated

0.43

Correlation Coefficient

British American  Mastercard Incorporated

Very weak diversification

The 3 months correlation between British and Mastercard is 0.43. Overlapping area represents the amount of risk that can be diversified away by holding British American Tobacco and Mastercard Incorporated in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Mastercard Incorporated 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 Mastercard Incorporated. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Mastercard Incorporated has no effect on the direction of British American i.e., British American and Mastercard Incorporated go up and down completely randomly.

Pair Corralation between British American and Mastercard Incorporated

Assuming the 90 days trading horizon British American Tobacco is expected to generate 1.13 times more return on investment than Mastercard Incorporated. However, British American is 1.13 times more volatile than Mastercard Incorporated. It trades about 0.09 of its potential returns per unit of risk. Mastercard Incorporated is currently generating about -0.01 per unit of risk. If you would invest  3,502  in British American Tobacco on December 25, 2024 and sell it today you would earn a total of  282.00  from holding British American Tobacco or generate 8.05% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.36%
Values	Daily Returns

British American Tobacco  vs.  Mastercard Incorporated

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 6 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively fragile basic indicators, British American may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Mastercard Incorporated

Risk-Adjusted Performance

Very Weak

Over the last 90 days Mastercard Incorporated has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong forward indicators, Mastercard Incorporated is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with British American and Mastercard Incorporated

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

The idea behind British American Tobacco and Mastercard Incorporated 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..