Correlation Between British Amer and Transpaco

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

Diversification Opportunities for British Amer and Transpaco

-0.66

Correlation Coefficient

British Amer  Transpaco

Excellent diversification

The 3 months correlation between British and Transpaco is -0.66. Overlapping area represents the amount of risk that can be diversified away by holding British American Tobacco and Transpaco in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Transpaco 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 Transpaco. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Transpaco has no effect on the direction of British Amer i.e., British Amer and Transpaco go up and down completely randomly.

Pair Corralation between British Amer and Transpaco

Assuming the 90 days trading horizon British Amer is expected to generate 1.14 times less return on investment than Transpaco. But when comparing it to its historical volatility, British American Tobacco is 5.6 times less risky than Transpaco. It trades about 0.05 of its potential returns per unit of risk. Transpaco is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  370,000  in Transpaco on October 22, 2024 and sell it today you would lose (5,000) from holding Transpaco or give up 1.35% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	94.74%
Values	Daily Returns

British American Tobacco  vs.  Transpaco

British American Tobacco

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in British American Tobacco are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady technical and fundamental indicators, British Amer exhibited solid returns over the last few months and may actually be approaching a breakup point.

Transpaco

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with British Amer and Transpaco

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

The idea behind British American Tobacco and Transpaco 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 Portfolio Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.