Can any of the company-specific risk be diversified away by investing in both Chevron Corp and B of A 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 Chevron Corp and B of A into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Chevron Corp and Bank Of America, you can compare the effects of market volatilities on Chevron Corp and B of A 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 Chevron Corp with a short position of B of A. Check out your portfolio center. Please also check ongoing floating volatility patterns of Chevron Corp and B of A.
Diversification Opportunities for Chevron Corp and B of A
The 3 months correlation between Chevron and BAC is -0.01. Overlapping area represents the amount of risk that can be diversified away by holding Chevron Corp and Bank Of America in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Bank Of America and Chevron Corp 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 Chevron Corp are associated (or correlated) with B of A. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Bank Of America has no effect on the direction of Chevron Corp i.e., Chevron Corp and B of A go up and down completely randomly.
Considering the 90-day investment horizon Chevron Corp is expected to generate 0.96 times more return on investment than B of A. However, Chevron Corp is 1.05 times less risky than B of A. It trades about 0.07 of its potential returns per unit of risk. Bank Of America is currently generating about -0.03 per unit of risk. If you would invest 9,715 in Chevron Corp on June 26, 2023 and sell it today you would earn a total of 6,913 from holding Chevron Corp or generate 71.16% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in Chevron Corp are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of fairly unsteady basic indicators, Chevron Corp may actually be approaching a critical reversion point that can send shares even higher in October 2023.
Over the last 90 days Bank Of America has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, B of A is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.
The main advantage of trading using opposite Chevron Corp and B of A positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Chevron Corp position performs unexpectedly, B of A 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 B of A will offset losses from the drop in B of A's long position.
The idea behind Chevron Corp and Bank Of America 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.
Check out your portfolio center. 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.
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