Correlation Between British Amer and Life Healthcare

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

Diversification Opportunities for British Amer and Life Healthcare

0.08

Correlation Coefficient

British Amer  Life Healthcare

Significant diversification

The 3 months correlation between British and Life is 0.08. Overlapping area represents the amount of risk that can be diversified away by holding British American Tobacco and Life Healthcare in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Life Healthcare and British Amer 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 Life Healthcare. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Life Healthcare has no effect on the direction of British Amer i.e., British Amer and Life Healthcare go up and down completely randomly.

Pair Corralation between British Amer and Life Healthcare

Assuming the 90 days trading horizon British American Tobacco is expected to under-perform the Life Healthcare. But the stock apears to be less risky and, when comparing its historical volatility, British American Tobacco is 1.45 times less risky than Life Healthcare. The stock trades about -0.01 of its potential returns per unit of risk. The Life Healthcare is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  151,700  in Life Healthcare on September 16, 2024 and sell it today you would earn a total of  21,400  from holding Life Healthcare or generate 14.11% return on investment over 90 days.

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

British American Tobacco  vs.  Life Healthcare

British American Tobacco

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days British American Tobacco has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound technical and fundamental indicators, British Amer is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Life Healthcare

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Life Healthcare are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady technical and fundamental indicators, Life Healthcare exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with British Amer and Life Healthcare

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

The idea behind British American Tobacco and Life Healthcare 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.

Check out your portfolio center.

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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.