Correlation Between Canadian Utilities and British American

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

By analyzing existing cross correlation between Canadian Utilities Limited and British American Tobacco, you can compare the effects of market volatilities on Canadian Utilities and British American 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 Canadian Utilities with a short position of British American. Check out your portfolio center. Please also check ongoing floating volatility patterns of Canadian Utilities and British American.

Diversification Opportunities for Canadian Utilities and British American

0.25

Correlation Coefficient

Canadian Utilities  British American

Modest diversification

The 3 months correlation between Canadian and British is 0.25. Overlapping area represents the amount of risk that can be diversified away by holding Canadian Utilities Limited and British American Tobacco in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on British American Tobacco and Canadian Utilities 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 Canadian Utilities Limited are associated (or correlated) with British American. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of British American Tobacco has no effect on the direction of Canadian Utilities i.e., Canadian Utilities and British American go up and down completely randomly.

Pair Corralation between Canadian Utilities and British American

Assuming the 90 days horizon Canadian Utilities Limited is expected to generate 1.2 times more return on investment than British American. However, Canadian Utilities is 1.2 times more volatile than British American Tobacco. It trades about 0.11 of its potential returns per unit of risk. British American Tobacco is currently generating about 0.12 per unit of risk. If you would invest  2,206  in Canadian Utilities Limited on September 2, 2024 and sell it today you would earn a total of  193.00  from holding Canadian Utilities Limited or generate 8.75% return on investment over 90 days.

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

Canadian Utilities Limited  vs.  British American Tobacco

Canadian Utilities

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Canadian Utilities Limited are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain basic indicators, Canadian Utilities may actually be approaching a critical reversion point that can send shares even higher in January 2025.

British American Tobacco

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in British American Tobacco are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unsteady basic indicators, British American may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Canadian Utilities and British American

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

The idea behind Canadian Utilities Limited and British American Tobacco 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.