Correlation Between Bank of America and Verona Pharma

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

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

Diversification Opportunities for Bank of America and Verona Pharma

0.87

Correlation Coefficient

Bank of America  Verona Pharma

Very poor diversification

The 3 months correlation between Bank and Verona is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Bank of America and Verona Pharma PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Verona Pharma PLC and Bank of America 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 Bank of America are associated (or correlated) with Verona Pharma. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Verona Pharma PLC has no effect on the direction of Bank of America i.e., Bank of America and Verona Pharma go up and down completely randomly.

Pair Corralation between Bank of America and Verona Pharma

Considering the 90-day investment horizon Bank of America is expected to generate 2.35 times less return on investment than Verona Pharma. But when comparing it to its historical volatility, Bank of America is 1.8 times less risky than Verona Pharma. It trades about 0.17 of its potential returns per unit of risk. Verona Pharma PLC is currently generating about 0.22 of returns per unit of risk over similar time horizon. If you would invest  2,721  in Verona Pharma PLC on August 31, 2024 and sell it today you would earn a total of  1,269  from holding Verona Pharma PLC or generate 46.64% return on investment over 90 days.

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

Bank of America  vs.  Verona Pharma PLC

Bank of America

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Bank of America are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of rather sluggish basic indicators, Bank of America exhibited solid returns over the last few months and may actually be approaching a breakup point.

Verona Pharma PLC

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Verona Pharma PLC are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. Despite somewhat unsteady basic indicators, Verona Pharma sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Bank of America and Verona Pharma

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

The idea behind Bank of America and Verona Pharma PLC 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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.