Correlation Between Universal and British Amer

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

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

Diversification Opportunities for Universal and British Amer

0.05

Correlation Coefficient

Universal  British Amer

Significant diversification

The 3 months correlation between Universal and British is 0.05. Overlapping area represents the amount of risk that can be diversified away by holding Universal 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 Universal 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 Universal are associated (or correlated) with British Amer. 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 Universal i.e., Universal and British Amer go up and down completely randomly.

Pair Corralation between Universal and British Amer

Considering the 90-day investment horizon Universal is expected to under-perform the British Amer. In addition to that, Universal is 1.01 times more volatile than British American Tobacco. It trades about -0.02 of its total potential returns per unit of risk. British American Tobacco is currently generating about 0.09 per unit of volatility. If you would invest  3,619  in British American Tobacco on November 19, 2024 and sell it today you would earn a total of  263.00  from holding British American Tobacco or generate 7.27% return on investment over 90 days.

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

Universal  vs.  British American Tobacco

Universal

Risk-Adjusted Performance

Very Weak

Over the last 90 days Universal has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Universal is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

British American Tobacco

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in British American Tobacco are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite fairly unfluctuating basic indicators, British Amer may actually be approaching a critical reversion point that can send shares even higher in March 2025.

Pair Trading with Universal and British Amer

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

The idea behind Universal 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.