Correlation Between BP Plc and Volkswagen

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Can any of the company-specific risk be diversified away by investing in both BP Plc and Volkswagen 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 BP Plc and Volkswagen into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between BP plc and Volkswagen AG, you can compare the effects of market volatilities on BP Plc and Volkswagen 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 BP Plc with a short position of Volkswagen. Check out your portfolio center. Please also check ongoing floating volatility patterns of BP Plc and Volkswagen.

Diversification Opportunities for BP Plc and Volkswagen

0.66
  Correlation Coefficient

Poor diversification

The 3 months correlation between BSU and Volkswagen is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding BP plc and Volkswagen AG in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Volkswagen AG and BP 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 BP plc are associated (or correlated) with Volkswagen. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Volkswagen AG has no effect on the direction of BP Plc i.e., BP Plc and Volkswagen go up and down completely randomly.

Pair Corralation between BP Plc and Volkswagen

Assuming the 90 days trading horizon BP plc is expected to generate 1.13 times more return on investment than Volkswagen. However, BP Plc is 1.13 times more volatile than Volkswagen AG. It trades about -0.01 of its potential returns per unit of risk. Volkswagen AG is currently generating about -0.34 per unit of risk. If you would invest  2,771  in BP plc on August 30, 2024 and sell it today you would lose (31.00) from holding BP plc or give up 1.12% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

BP plc  vs.  Volkswagen AG

 Performance 
       Timeline  
BP plc 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
Very Weak
Over the last 90 days BP plc has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest fragile performance, the Stock's basic indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.
Volkswagen AG 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
Very Weak
Over the last 90 days Volkswagen AG has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of uncertain performance in the last few months, the Stock's basic indicators remain rather sound which may send shares a bit higher in December 2024. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

BP Plc and Volkswagen Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with BP Plc and Volkswagen

The main advantage of trading using opposite BP Plc and Volkswagen positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if BP Plc position performs unexpectedly, Volkswagen 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 Volkswagen will offset losses from the drop in Volkswagen's long position.
The idea behind BP plc and Volkswagen AG 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.

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