Correlation Between Alliance Financial and BP Plastics

Can any of the company-specific risk be diversified away by investing in both Alliance Financial and BP Plastics 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 Alliance Financial and BP Plastics into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Alliance Financial Group and BP Plastics Holding, you can compare the effects of market volatilities on Alliance Financial and BP Plastics 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 Alliance Financial with a short position of BP Plastics. Check out your portfolio center. Please also check ongoing floating volatility patterns of Alliance Financial and BP Plastics.

Diversification Opportunities for Alliance Financial and BP Plastics

0.57

Correlation Coefficient

Alliance Financial  BP Plastics

Very weak diversification

The 3 months correlation between Alliance and 5100 is 0.57. Overlapping area represents the amount of risk that can be diversified away by holding Alliance Financial Group and BP Plastics Holding in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BP Plastics Holding and Alliance Financial 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 Alliance Financial Group are associated (or correlated) with BP Plastics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BP Plastics Holding has no effect on the direction of Alliance Financial i.e., Alliance Financial and BP Plastics go up and down completely randomly.

Pair Corralation between Alliance Financial and BP Plastics

Assuming the 90 days trading horizon Alliance Financial Group is expected to generate 0.23 times more return on investment than BP Plastics. However, Alliance Financial Group is 4.35 times less risky than BP Plastics. It trades about 0.18 of its potential returns per unit of risk. BP Plastics Holding is currently generating about -0.09 per unit of risk. If you would invest  379.00  in Alliance Financial Group on March 12, 2024 and sell it today you would earn a total of  8.00  from holding Alliance Financial Group or generate 2.11% return on investment over 90 days.

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

Alliance Financial Group  vs.  BP Plastics Holding

Alliance Financial

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Alliance Financial Group are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite quite conflicting basic indicators, Alliance Financial may actually be approaching a critical reversion point that can send shares even higher in July 2024.

BP Plastics Holding

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in BP Plastics Holding are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite quite conflicting basic indicators, BP Plastics may actually be approaching a critical reversion point that can send shares even higher in July 2024.

Pair Trading with Alliance Financial and BP Plastics

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

The idea behind Alliance Financial Group and BP Plastics Holding 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.