Correlation Between BTM and BF

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

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

Diversification Opportunities for BTM and BF

-0.16

Correlation Coefficient

BTM  BF

Good diversification

The 3 months correlation between BTM and BF is -0.16. Overlapping area represents the amount of risk that can be diversified away by holding BTM and BF in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BF and BTM 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 BTM are associated (or correlated) with BF. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BF has no effect on the direction of BTM i.e., BTM and BF go up and down completely randomly.

Pair Corralation between BTM and BF

Assuming the 90 days trading horizon BTM is expected to generate 2.89 times less return on investment than BF. In addition to that, BTM is 1.71 times more volatile than BF. It trades about 0.05 of its total potential returns per unit of risk. BF is currently generating about 0.25 per unit of volatility. If you would invest  0.17  in BF on September 2, 2024 and sell it today you would earn a total of  0.12  from holding BF or generate 67.87% return on investment over 90 days.

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

BTM  vs.  BF

BTM

Risk-Adjusted Performance

4 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in BTM are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady primary indicators, BTM exhibited solid returns over the last few months and may actually be approaching a breakup point.

BF

Risk-Adjusted Performance

19 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in BF are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, BF exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with BTM and BF

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

The idea behind BTM and BF 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 CEOs Directory module to screen CEOs from public companies around the world.