Correlation Between Rolls Royce and British American

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

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

Diversification Opportunities for Rolls Royce and British American

0.39

Correlation Coefficient

Rolls Royce  British American

Weak diversification

The 3 months correlation between Rolls and British is 0.39. Overlapping area represents the amount of risk that can be diversified away by holding Rolls Royce Holdings PLC 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 Rolls Royce 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 Rolls Royce Holdings PLC 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 Rolls Royce i.e., Rolls Royce and British American go up and down completely randomly.

Pair Corralation between Rolls Royce and British American

Assuming the 90 days trading horizon Rolls Royce Holdings PLC is expected to generate 1.31 times more return on investment than British American. However, Rolls Royce is 1.31 times more volatile than British American Tobacco. It trades about -0.02 of its potential returns per unit of risk. British American Tobacco is currently generating about -0.02 per unit of risk. If you would invest  58,860  in Rolls Royce Holdings PLC on October 6, 2024 and sell it today you would lose (360.00) from holding Rolls Royce Holdings PLC or give up 0.61% of portfolio value over 90 days.

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

Rolls Royce Holdings PLC  vs.  British American Tobacco

Rolls Royce Holdings

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Rolls Royce Holdings PLC are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, Rolls Royce may actually be approaching a critical reversion point that can send shares even higher in February 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 uncertain basic indicators, British American may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Rolls Royce and British American

The main advantage of trading using opposite Rolls Royce and British American positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Rolls Royce 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 Rolls Royce Holdings PLC 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.

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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 Equity Search module to search for actively traded equities including funds and ETFs from over 30 global markets.