Correlation Between Nestle Bhd and British American

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

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

Diversification Opportunities for Nestle Bhd and British American

-0.18

Correlation Coefficient

Nestle Bhd  British American

Good diversification

The 3 months correlation between Nestle and British is -0.18. Overlapping area represents the amount of risk that can be diversified away by holding Nestle Bhd 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 Nestle Bhd 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 Nestle Bhd are associated (or correlated) with British American. 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 Nestle Bhd i.e., Nestle Bhd and British American go up and down completely randomly.

Pair Corralation between Nestle Bhd and British American

Assuming the 90 days trading horizon Nestle Bhd is expected to under-perform the British American. But the stock apears to be less risky and, when comparing its historical volatility, Nestle Bhd is 1.52 times less risky than British American. The stock trades about -0.03 of its potential returns per unit of risk. The British American Tobacco is currently generating about 0.0 of returns per unit of risk over similar time horizon. If you would invest  750.00  in British American Tobacco on September 14, 2024 and sell it today you would lose (5.00) from holding British American Tobacco or give up 0.67% of portfolio value over 90 days.

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

Nestle Bhd  vs.  British American Tobacco

Nestle Bhd

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Nestle Bhd has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent basic indicators, Nestle Bhd is not utilizing all of its potentials. The latest stock price mess, may contribute to short-term losses for the institutional investors.

British American Tobacco

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days British American Tobacco has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent basic indicators, British American is not utilizing all of its potentials. The latest stock price mess, may contribute to short-term losses for the institutional investors.

Pair Trading with Nestle Bhd and British American

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

The idea behind Nestle Bhd 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.