Correlation Between Visa and BAE Systems

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

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

Diversification Opportunities for Visa and BAE Systems

-0.1

Correlation Coefficient

Visa  BAE Systems

Good diversification

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

Pair Corralation between Visa and BAE Systems

Taking into account the 90-day investment horizon Visa Class A is expected to generate 0.73 times more return on investment than BAE Systems. However, Visa Class A is 1.38 times less risky than BAE Systems. It trades about 0.16 of its potential returns per unit of risk. BAE Systems PLC is currently generating about -0.07 per unit of risk. If you would invest  27,801  in Visa Class A on September 3, 2024 and sell it today you would earn a total of  3,707  from holding Visa Class A or generate 13.33% return on investment over 90 days.

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

Visa Class A  vs.  BAE Systems PLC

Visa Class A

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Visa Class A are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Visa showed solid returns over the last few months and may actually be approaching a breakup point.

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 fragile 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 Visa and BAE Systems

The main advantage of trading using opposite Visa and BAE Systems positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Visa 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 Visa Class A 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.

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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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..