Correlation Between Solvay SA and BASF SE

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

By analyzing existing cross correlation between Solvay SA ADR and BASF SE NA, you can compare the effects of market volatilities on Solvay SA and BASF SE 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 Solvay SA with a short position of BASF SE. Check out your portfolio center. Please also check ongoing floating volatility patterns of Solvay SA and BASF SE.

Diversification Opportunities for Solvay SA and BASF SE

0.72

Correlation Coefficient

Solvay SA  BASF SE

Poor diversification

The 3 months correlation between Solvay and BASF is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Solvay SA ADR and BASF SE NA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BASF SE NA and Solvay SA 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 Solvay SA ADR are associated (or correlated) with BASF SE. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BASF SE NA has no effect on the direction of Solvay SA i.e., Solvay SA and BASF SE go up and down completely randomly.

Pair Corralation between Solvay SA and BASF SE

Assuming the 90 days horizon Solvay SA is expected to generate 1.71 times less return on investment than BASF SE. But when comparing it to its historical volatility, Solvay SA ADR is 1.34 times less risky than BASF SE. It trades about 0.12 of its potential returns per unit of risk. BASF SE NA is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest  4,465  in BASF SE NA on December 20, 2024 and sell it today you would earn a total of  1,335  from holding BASF SE NA or generate 29.9% return on investment over 90 days.

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

Solvay SA ADR  vs.  BASF SE NA

Solvay SA ADR

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Solvay SA ADR are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, Solvay SA showed solid returns over the last few months and may actually be approaching a breakup point.

BASF SE NA

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in BASF SE NA are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak basic indicators, BASF SE reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Solvay SA and BASF SE

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

The idea behind Solvay SA ADR and BASF SE NA 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.