Correlation Between BAE Systems and AeroVironment

Can any of the company-specific risk be diversified away by investing in both BAE Systems and AeroVironment 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 AeroVironment 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 AeroVironment, you can compare the effects of market volatilities on BAE Systems and AeroVironment 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 AeroVironment. Check out your portfolio center. Please also check ongoing floating volatility patterns of BAE Systems and AeroVironment.

Diversification Opportunities for BAE Systems and AeroVironment

0.22

Correlation Coefficient

BAE Systems  AeroVironment

Modest diversification

The 3 months correlation between BAE and AeroVironment is 0.22. Overlapping area represents the amount of risk that can be diversified away by holding BAE Systems PLC and AeroVironment in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AeroVironment 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 AeroVironment. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of AeroVironment has no effect on the direction of BAE Systems i.e., BAE Systems and AeroVironment go up and down completely randomly.

Pair Corralation between BAE Systems and AeroVironment

Assuming the 90 days horizon BAE Systems PLC is expected to under-perform the AeroVironment. But the pink sheet apears to be less risky and, when comparing its historical volatility, BAE Systems PLC is 1.76 times less risky than AeroVironment. The pink sheet trades about -0.06 of its potential returns per unit of risk. The AeroVironment is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  19,404  in AeroVironment on September 4, 2024 and sell it today you would earn a total of  915.00  from holding AeroVironment or generate 4.72% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.44%
Values	Daily Returns

BAE Systems PLC  vs.  AeroVironment

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 fragile performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

AeroVironment

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in AeroVironment are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, AeroVironment may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with BAE Systems and AeroVironment

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

The idea behind BAE Systems PLC and AeroVironment 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 Piotroski F Score module to get Piotroski F Score based on the binary analysis strategy of nine different fundamentals.