Correlation Between Transocean and British American

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

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

Diversification Opportunities for Transocean and British American

-0.1

Correlation Coefficient

Transocean  British American

Good diversification

The 3 months correlation between Transocean and British is -0.1. Overlapping area represents the amount of risk that can be diversified away by holding Transocean 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 Transocean 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 Transocean 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 Transocean i.e., Transocean and British American go up and down completely randomly.

Pair Corralation between Transocean and British American

Assuming the 90 days trading horizon Transocean is expected to under-perform the British American. In addition to that, Transocean is 1.07 times more volatile than British American Tobacco. It trades about -0.07 of its total potential returns per unit of risk. British American Tobacco is currently generating about -0.05 per unit of volatility. If you would invest  4,542  in British American Tobacco on October 17, 2024 and sell it today you would lose (231.00) from holding British American Tobacco or give up 5.09% of portfolio value over 90 days.

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

Transocean  vs.  British American Tobacco

Transocean

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Transocean has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong technical and fundamental indicators, Transocean is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

British American Tobacco

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in British American Tobacco are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, British American may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Transocean and British American

The main advantage of trading using opposite Transocean and British American positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Transocean 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 Transocean 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.