Correlation Between Bank of America and Basic Materials

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

Diversification Opportunities for Bank of America and Basic Materials

0.22

Correlation Coefficient

Bank of America  Basic Materials

Modest diversification

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

Pair Corralation between Bank of America and Basic Materials

Assuming the 90 days trading horizon Bank of America is expected to generate 1.6 times more return on investment than Basic Materials. However, Bank of America is 1.6 times more volatile than Basic Materials. It trades about 0.24 of its potential returns per unit of risk. Basic Materials is currently generating about -0.07 per unit of risk. If you would invest  5,387  in Bank of America on September 29, 2024 and sell it today you would earn a total of  1,481  from holding Bank of America or generate 27.49% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.39%
Values	Daily Returns

Bank of America  vs.  Basic Materials

Pair Trading with Bank of America and Basic Materials

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

The idea behind Bank of America and Basic Materials 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 Transaction History module to view history of all your transactions and understand their impact on performance.