Correlation Between BAE Systems and Reliance Industries

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

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

Diversification Opportunities for BAE Systems and Reliance Industries

-0.15

Correlation Coefficient

BAE Systems  Reliance Industries

Good diversification

The 3 months correlation between BAE and Reliance is -0.15. Overlapping area represents the amount of risk that can be diversified away by holding BAE Systems plc and Reliance Industries Ltd in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Reliance Industries and BAE Systems 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 BAE Systems plc are associated (or correlated) with Reliance Industries. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Reliance Industries has no effect on the direction of BAE Systems i.e., BAE Systems and Reliance Industries go up and down completely randomly.

Pair Corralation between BAE Systems and Reliance Industries

Assuming the 90 days trading horizon BAE Systems plc is expected to generate 1.35 times more return on investment than Reliance Industries. However, BAE Systems is 1.35 times more volatile than Reliance Industries Ltd. It trades about -0.07 of its potential returns per unit of risk. Reliance Industries Ltd is currently generating about -0.22 per unit of risk. If you would invest  127,890  in BAE Systems plc on September 19, 2024 and sell it today you would lose (10,540) from holding BAE Systems plc or give up 8.24% of portfolio value over 90 days.

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

BAE Systems plc  vs.  Reliance Industries Ltd

BAE Systems plc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days BAE Systems plc has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Stock's basic indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Reliance Industries

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Reliance Industries Ltd has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of uncertain performance in the last few months, the Stock's basic indicators remain comparatively stable which may send shares a bit higher in January 2025. The newest uproar may also be a sign of mid-term up-swing for the firm private investors.

Pair Trading with BAE Systems and Reliance Industries

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

The idea behind BAE Systems plc and Reliance Industries Ltd 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..