Correlation Between British Amer and Mereo BioPharma

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

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

Diversification Opportunities for British Amer and Mereo BioPharma

0.03

Correlation Coefficient

British Amer  Mereo BioPharma

Significant diversification

The 3 months correlation between British and Mereo is 0.03. Overlapping area represents the amount of risk that can be diversified away by holding British American Tobacco and Mereo BioPharma Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Mereo BioPharma Group and British Amer 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 British American Tobacco are associated (or correlated) with Mereo BioPharma. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Mereo BioPharma Group has no effect on the direction of British Amer i.e., British Amer and Mereo BioPharma go up and down completely randomly.

Pair Corralation between British Amer and Mereo BioPharma

Considering the 90-day investment horizon British American Tobacco is expected to generate 0.39 times more return on investment than Mereo BioPharma. However, British American Tobacco is 2.56 times less risky than Mereo BioPharma. It trades about 0.03 of its potential returns per unit of risk. Mereo BioPharma Group is currently generating about -0.15 per unit of risk. If you would invest  2,895  in British American Tobacco on January 26, 2024 and sell it today you would earn a total of  54.00  from holding British American Tobacco or generate 1.87% return on investment over 90 days.

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

British American Tobacco  vs.  Mereo BioPharma Group

British American Tobacco

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in British American Tobacco are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite fairly strong basic indicators, British Amer is not utilizing all of its potentials. The latest stock price confusion, may contribute to short-horizon losses for the traders.

Mereo BioPharma Group

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Mereo BioPharma Group has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unfluctuating performance in the last few months, the Stock's technical and fundamental indicators remain very healthy which may send shares a bit higher in May 2024. The recent disarray may also be a sign of long period up-swing for the firm investors.

Pair Trading with British Amer and Mereo BioPharma

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

The idea behind British American Tobacco and Mereo BioPharma Group 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.