Correlation Between Centrica PLC and BAE Systems

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

By analyzing existing cross correlation between Centrica PLC and BAE Systems plc, you can compare the effects of market volatilities on Centrica PLC and BAE Systems 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 Centrica PLC with a short position of BAE Systems. Check out your portfolio center. Please also check ongoing floating volatility patterns of Centrica PLC and BAE Systems.

Diversification Opportunities for Centrica PLC and BAE Systems

-0.38

Correlation Coefficient

Centrica PLC  BAE Systems

Very good diversification

The 3 months correlation between Centrica and BAE is -0.38. Overlapping area represents the amount of risk that can be diversified away by holding Centrica PLC and BAE Systems plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BAE Systems plc and Centrica PLC 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 Centrica PLC are associated (or correlated) with BAE Systems. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BAE Systems plc has no effect on the direction of Centrica PLC i.e., Centrica PLC and BAE Systems go up and down completely randomly.

Pair Corralation between Centrica PLC and BAE Systems

Assuming the 90 days trading horizon Centrica PLC is expected to generate 75.68 times more return on investment than BAE Systems. However, Centrica PLC is 75.68 times more volatile than BAE Systems plc. It trades about 0.11 of its potential returns per unit of risk. BAE Systems plc is currently generating about -0.07 per unit of risk. If you would invest  11,509  in Centrica PLC on October 1, 2024 and sell it today you would earn a total of  1,676  from holding Centrica PLC or generate 14.56% return on investment over 90 days.

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

Centrica PLC  vs.  BAE Systems plc

Centrica PLC

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Centrica PLC are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady technical and fundamental indicators, Centrica PLC exhibited solid returns over the last few months and may actually be approaching a breakup point.

BAE Systems plc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days BAE Systems plc has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Stock's basic indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Pair Trading with Centrica PLC and BAE Systems

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

The idea behind Centrica PLC and BAE Systems plc 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.