Correlation Between Diageo PLC and BAE Systems

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

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

Diversification Opportunities for Diageo PLC and BAE Systems

-0.31

Correlation Coefficient

Diageo PLC  BAE Systems

Very good diversification

The 3 months correlation between Diageo and BAE is -0.31. Overlapping area represents the amount of risk that can be diversified away by holding Diageo PLC and BAE Systems plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BAE Systems plc and Diageo PLC 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 Diageo PLC are associated (or correlated) with BAE Systems. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BAE Systems plc has no effect on the direction of Diageo PLC i.e., Diageo PLC and BAE Systems go up and down completely randomly.

Pair Corralation between Diageo PLC and BAE Systems

Assuming the 90 days trading horizon Diageo PLC is expected to under-perform the BAE Systems. But the stock apears to be less risky and, when comparing its historical volatility, Diageo PLC is 1.05 times less risky than BAE Systems. The stock trades about -0.04 of its potential returns per unit of risk. The BAE Systems plc is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  81,937  in BAE Systems plc on September 19, 2024 and sell it today you would earn a total of  35,063  from holding BAE Systems plc or generate 42.79% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	99.8%
Values	Daily Returns

Diageo PLC  vs.  BAE Systems plc

Diageo PLC

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Diageo PLC has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound technical and fundamental indicators, Diageo PLC is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

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 uncertain performance, the Stock's basic indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Pair Trading with Diageo PLC and BAE Systems

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

The idea behind Diageo PLC and BAE Systems plc 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 Funds Screener module to find actively-traded funds from around the world traded on over 30 global exchanges.