Correlation Between Bank of America and SBF 120

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Apply Can any of the company-specific risk be diversified away by investing in both Bank of America and SBF 120 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 Bank of America and SBF 120 into the same portfolio, which is an essential part of the fundamental portfolio management process.

Diversification Opportunities for Bank of America and SBF 120

Pair Corralation between Bank of America and SBF 120

Bank of America  vs.  SBF 120

Pair Trading with Bank of America and SBF 120

The main advantage of trading using opposite Bank of America and SBF 120 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Bank of America position performs unexpectedly, SBF 120 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 SBF 120 will offset losses from the drop in SBF 120's long position.The idea behind Bank of America and SBF 120 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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