Correlation Between British American and Universal

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

Diversification Opportunities for British American and Universal

0.52

Correlation Coefficient

British American  Universal

Very weak diversification

The 3 months correlation between British and Universal is 0.52. Overlapping area represents the amount of risk that can be diversified away by holding British American Tobacco and Universal in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Universal 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. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Universal has no effect on the direction of British American i.e., British American and Universal go up and down completely randomly.

Pair Corralation between British American and Universal

Assuming the 90 days horizon British American Tobacco is expected to generate 2.28 times more return on investment than Universal. However, British American is 2.28 times more volatile than Universal. It trades about 0.08 of its potential returns per unit of risk. Universal is currently generating about 0.06 per unit of risk. If you would invest  3,477  in British American Tobacco on December 30, 2024 and sell it today you would earn a total of  515.00  from holding British American Tobacco or generate 14.81% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.39%
Values	Daily Returns

British American Tobacco  vs.  Universal

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. Despite nearly weak technical and fundamental indicators, British American reported solid returns over the last few months and may actually be approaching a breakup point.

Universal

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Universal are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable basic indicators, Universal is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Pair Trading with British American and Universal

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

The idea behind British American Tobacco and Universal 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 Transaction History module to view history of all your transactions and understand their impact on performance.