Correlation Between British American and NorAm Drilling

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

Diversification Opportunities for British American and NorAm Drilling

-0.51

Correlation Coefficient

British American  NorAm Drilling

Excellent diversification

The 3 months correlation between British and NorAm is -0.51. Overlapping area represents the amount of risk that can be diversified away by holding British American Tobacco and NorAm Drilling AS in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NorAm Drilling AS 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 NorAm Drilling. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NorAm Drilling AS has no effect on the direction of British American i.e., British American and NorAm Drilling go up and down completely randomly.

Pair Corralation between British American and NorAm Drilling

Assuming the 90 days trading horizon British American is expected to generate 10.56 times less return on investment than NorAm Drilling. But when comparing it to its historical volatility, British American Tobacco is 9.56 times less risky than NorAm Drilling. It trades about 0.12 of its potential returns per unit of risk. NorAm Drilling AS is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  276.00  in NorAm Drilling AS on October 26, 2024 and sell it today you would earn a total of  39.00  from holding NorAm Drilling AS or generate 14.13% return on investment over 90 days.

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

British American Tobacco  vs.  NorAm Drilling AS

British American Tobacco

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in British American Tobacco are ranked lower than 18 (%) 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 February 2025.

NorAm Drilling AS

Risk-Adjusted Performance

3 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in NorAm Drilling AS are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, NorAm Drilling reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with British American and NorAm Drilling

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

The idea behind British American Tobacco and NorAm Drilling AS 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 Equity Search module to search for actively traded equities including funds and ETFs from over 30 global markets.