Correlation Between Thales SA and BAE Systems

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

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

Diversification Opportunities for Thales SA and BAE Systems

0.58

Correlation Coefficient

Thales SA  BAE Systems

Very weak diversification

The 3 months correlation between Thales and BAE is 0.58. Overlapping area represents the amount of risk that can be diversified away by holding Thales SA 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 Thales SA 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 Thales SA 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 Thales SA i.e., Thales SA and BAE Systems go up and down completely randomly.

Pair Corralation between Thales SA and BAE Systems

Assuming the 90 days horizon Thales SA is expected to under-perform the BAE Systems. But the pink sheet apears to be less risky and, when comparing its historical volatility, Thales SA is 1.2 times less risky than BAE Systems. The pink sheet trades about -0.15 of its potential returns per unit of risk. The BAE Systems PLC is currently generating about -0.01 of returns per unit of risk over similar time horizon. If you would invest  6,455  in BAE Systems PLC on September 5, 2024 and sell it today you would lose (70.00) from holding BAE Systems PLC or give up 1.08% of portfolio value over 90 days.

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

Thales SA  vs.  BAE Systems PLC

Thales SA

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Thales SA has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile performance, the Stock's technical and fundamental indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

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 fairly strong basic indicators, BAE Systems is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Thales SA and BAE Systems

The main advantage of trading using opposite Thales SA and BAE Systems positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Thales SA 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 Thales SA 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.