Correlation Between Capital One and Babcock Wilcox

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

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

Diversification Opportunities for Capital One and Babcock Wilcox

0.7

Correlation Coefficient

Capital One  Babcock Wilcox

Poor diversification

The 3 months correlation between Capital and Babcock is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Capital One Financial and Babcock Wilcox Enterprises in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Babcock Wilcox Enter and Capital One 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 Capital One Financial are associated (or correlated) with Babcock Wilcox. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Babcock Wilcox Enter has no effect on the direction of Capital One i.e., Capital One and Babcock Wilcox go up and down completely randomly.

Pair Corralation between Capital One and Babcock Wilcox

Assuming the 90 days trading horizon Capital One is expected to generate 1.37 times less return on investment than Babcock Wilcox. But when comparing it to its historical volatility, Capital One Financial is 3.68 times less risky than Babcock Wilcox. It trades about 0.05 of its potential returns per unit of risk. Babcock Wilcox Enterprises is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  1,473  in Babcock Wilcox Enterprises on September 12, 2024 and sell it today you would lose (30.00) from holding Babcock Wilcox Enterprises or give up 2.04% of portfolio value over 90 days.

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

Capital One Financial  vs.  Babcock Wilcox Enterprises

Capital One Financial

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Capital One Financial has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively steady technical and fundamental indicators, Capital One is not utilizing all of its potentials. The current stock price chaos, may contribute to medium-term losses for the stakeholders.

Babcock Wilcox Enter

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Babcock Wilcox Enterprises are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Babcock Wilcox is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Capital One and Babcock Wilcox

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

The idea behind Capital One Financial and Babcock Wilcox Enterprises 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.