Correlation Between BorgWarner and Allison Transmission

Can any of the company-specific risk be diversified away by investing in both BorgWarner and Allison Transmission 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 BorgWarner and Allison Transmission into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between BorgWarner and Allison Transmission Holdings, you can compare the effects of market volatilities on BorgWarner and Allison Transmission 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 BorgWarner with a short position of Allison Transmission. Check out your portfolio center. Please also check ongoing floating volatility patterns of BorgWarner and Allison Transmission.

Diversification Opportunities for BorgWarner and Allison Transmission

0.83

Correlation Coefficient

BorgWarner  Allison Transmission

Very poor diversification

The 3 months correlation between BorgWarner and Allison is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding BorgWarner and Allison Transmission Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Allison Transmission and BorgWarner 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 BorgWarner are associated (or correlated) with Allison Transmission. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Allison Transmission has no effect on the direction of BorgWarner i.e., BorgWarner and Allison Transmission go up and down completely randomly.

Pair Corralation between BorgWarner and Allison Transmission

Considering the 90-day investment horizon BorgWarner is expected to under-perform the Allison Transmission. But the stock apears to be less risky and, when comparing its historical volatility, BorgWarner is 1.27 times less risky than Allison Transmission. The stock trades about -0.09 of its potential returns per unit of risk. The Allison Transmission Holdings is currently generating about -0.07 of returns per unit of risk over similar time horizon. If you would invest  10,774  in Allison Transmission Holdings on December 30, 2024 and sell it today you would lose (1,168) from holding Allison Transmission Holdings or give up 10.84% of portfolio value over 90 days.

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

BorgWarner  vs.  Allison Transmission Holdings

BorgWarner

Risk-Adjusted Performance

Very Weak

Over the last 90 days BorgWarner has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Allison Transmission

Risk-Adjusted Performance

Very Weak

Over the last 90 days Allison Transmission Holdings has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's basic indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

Pair Trading with BorgWarner and Allison Transmission

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

The idea behind BorgWarner and Allison Transmission Holdings 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.