Correlation Between Visa and British Amer

Can any of the company-specific risk be diversified away by investing in both Visa 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 Visa and British Amer 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 British American Tobacco, you can compare the effects of market volatilities on Visa 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 Visa with a short position of British Amer. Check out your portfolio center. Please also check ongoing floating volatility patterns of Visa and British Amer.

Diversification Opportunities for Visa and British Amer

0.5

Correlation Coefficient

Visa  British Amer

Very weak diversification

The 3 months correlation between Visa and British is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding Visa Class A 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 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 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 Visa i.e., Visa and British Amer go up and down completely randomly.

Pair Corralation between Visa and British Amer

Taking into account the 90-day investment horizon Visa Class A is expected to under-perform the British Amer. But the stock apears to be less risky and, when comparing its historical volatility, Visa Class A is 1.43 times less risky than British Amer. The stock trades about -0.17 of its potential returns per unit of risk. The British American Tobacco is currently generating about -0.09 of returns per unit of risk over similar time horizon. If you would invest  3,005  in British American Tobacco on January 25, 2024 and sell it today you would lose (56.00) from holding British American Tobacco or give up 1.86% of portfolio value over 90 days.

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

Visa Class A  vs.  British American Tobacco

Visa Class A

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Visa Class A are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable basic indicators, Visa is not utilizing all of its potentials. The newest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

British American Tobacco

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in British American Tobacco are ranked lower than 3 (%) 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.

Pair Trading with Visa and British Amer

The main advantage of trading using opposite Visa and British Amer positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Visa 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 Visa Class A 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..