Correlation Between AE and BRC

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

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

Diversification Opportunities for AE and BRC

0.36

Correlation Coefficient

AE  BRC

Weak diversification

The 3 months correlation between AE and BRC is 0.36. Overlapping area represents the amount of risk that can be diversified away by holding AE and BRC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BRC and AE 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 AE are associated (or correlated) with BRC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BRC has no effect on the direction of AE i.e., AE and BRC go up and down completely randomly.

Pair Corralation between AE and BRC

If you would invest  2.73  in AE on September 2, 2024 and sell it today you would earn a total of  0.91  from holding AE or generate 33.33% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	1.52%
Values	Daily Returns

AE  vs.  BRC

AE

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in AE are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, AE exhibited solid returns over the last few months and may actually be approaching a breakup point.

BRC

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days BRC has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound fundamental indicators, BRC is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with AE and BRC

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

The idea behind AE and BRC 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 Bonds Directory module to find actively traded corporate debentures issued by US companies.