Correlation Between Amazon and BG Foods
Can any of the company-specific risk be diversified away by investing in both Amazon and BG Foods 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 Amazon and BG Foods into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Amazon Inc and BG Foods, you can compare the effects of market volatilities on Amazon and BG Foods 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 Amazon with a short position of BG Foods. Check out your portfolio center. Please also check ongoing floating volatility patterns of Amazon and BG Foods.
Diversification Opportunities for Amazon and BG Foods
Excellent diversification
The 3 months correlation between Amazon and DHR is -0.58. Overlapping area represents the amount of risk that can be diversified away by holding Amazon Inc and BG Foods in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BG Foods and Amazon 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 Amazon Inc are associated (or correlated) with BG Foods. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BG Foods has no effect on the direction of Amazon i.e., Amazon and BG Foods go up and down completely randomly.
Pair Corralation between Amazon and BG Foods
Assuming the 90 days trading horizon Amazon is expected to generate 1.21 times less return on investment than BG Foods. But when comparing it to its historical volatility, Amazon Inc is 2.15 times less risky than BG Foods. It trades about 0.43 of its potential returns per unit of risk. BG Foods is currently generating about 0.24 of returns per unit of risk over similar time horizon. If you would invest 599.00 in BG Foods on September 21, 2024 and sell it today you would earn a total of 95.00 from holding BG Foods or generate 15.86% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Amazon Inc vs. BG Foods
Performance |
| Timeline |
| Amazon Inc |
| BG Foods |
Amazon and BG Foods Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Amazon and BG Foods
The main advantage of trading using opposite Amazon and BG Foods positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Amazon position performs unexpectedly, BG Foods 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 BG Foods will offset losses from the drop in BG Foods' long position.The idea behind Amazon Inc and BG Foods 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.Check out your portfolio center.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.
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