Correlation Between BHP and American International

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

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

Diversification Opportunities for BHP and American International

0.03

Correlation Coefficient

BHP  American International

Significant diversification

The 3 months correlation between BHP and American is 0.03. Overlapping area represents the amount of risk that can be diversified away by holding BHP Group and American International Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American International and BHP 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 BHP Group are associated (or correlated) with American International. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American International has no effect on the direction of BHP i.e., BHP and American International go up and down completely randomly.

Pair Corralation between BHP and American International

Assuming the 90 days trading horizon BHP Group is expected to under-perform the American International. But the stock apears to be less risky and, when comparing its historical volatility, BHP Group is 2.74 times less risky than American International. The stock trades about -0.13 of its potential returns per unit of risk. The American International Group is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  143,332  in American International Group on September 27, 2024 and sell it today you would earn a total of  8,018  from holding American International Group or generate 5.59% return on investment over 90 days.

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

BHP Group  vs.  American International Group

BHP Group

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days BHP Group has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, BHP is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

American International

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in American International Group are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong technical and fundamental indicators, American International is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with BHP and American International

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

The idea behind BHP Group and American International Group 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 Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.