Correlation Between General Dynamics and BAE Systems

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

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

Diversification Opportunities for General Dynamics and BAE Systems

0.91

Correlation Coefficient

General Dynamics  BAE Systems

Almost no diversification

The 3 months correlation between General and BAE is 0.91. Overlapping area represents the amount of risk that can be diversified away by holding General Dynamics 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 General Dynamics 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 General Dynamics 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 General Dynamics i.e., General Dynamics and BAE Systems go up and down completely randomly.

Pair Corralation between General Dynamics and BAE Systems

Allowing for the 90-day total investment horizon General Dynamics is expected to generate 0.83 times more return on investment than BAE Systems. However, General Dynamics is 1.21 times less risky than BAE Systems. It trades about -0.03 of its potential returns per unit of risk. BAE Systems PLC is currently generating about -0.04 per unit of risk. If you would invest  28,302  in General Dynamics on September 30, 2024 and sell it today you would lose (1,688) from holding General Dynamics or give up 5.96% of portfolio value over 90 days.

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

General Dynamics  vs.  BAE Systems PLC

General Dynamics

Risk-Adjusted Performance

0 of 100

Very Weak

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

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 inconsistent 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.

Pair Trading with General Dynamics and BAE Systems

The main advantage of trading using opposite General Dynamics and BAE Systems positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if General Dynamics 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 General Dynamics 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.