Correlation Between ABSA Bank and Firstrand

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

By analyzing existing cross correlation between ABSA Bank Limited and Firstrand, you can compare the effects of market volatilities on ABSA Bank and Firstrand 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 ABSA Bank with a short position of Firstrand. Check out your portfolio center. Please also check ongoing floating volatility patterns of ABSA Bank and Firstrand.

Diversification Opportunities for ABSA Bank and Firstrand

-0.54

Correlation Coefficient

ABSA Bank  Firstrand

Excellent diversification

The 3 months correlation between ABSA and Firstrand is -0.54. Overlapping area represents the amount of risk that can be diversified away by holding ABSA Bank Limited and Firstrand in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Firstrand and ABSA Bank 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 ABSA Bank Limited are associated (or correlated) with Firstrand. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Firstrand has no effect on the direction of ABSA Bank i.e., ABSA Bank and Firstrand go up and down completely randomly.

Pair Corralation between ABSA Bank and Firstrand

Assuming the 90 days trading horizon ABSA Bank is expected to generate 7.54 times less return on investment than Firstrand. But when comparing it to its historical volatility, ABSA Bank Limited is 1.46 times less risky than Firstrand. It trades about 0.05 of its potential returns per unit of risk. Firstrand is currently generating about 0.27 of returns per unit of risk over similar time horizon. If you would invest  762,500  in Firstrand on September 16, 2024 and sell it today you would earn a total of  51,400  from holding Firstrand or generate 6.74% return on investment over 90 days.

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

ABSA Bank Limited  vs.  Firstrand

ABSA Bank Limited

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in ABSA Bank Limited are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unsteady basic indicators, ABSA Bank may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Firstrand

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Firstrand are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound technical and fundamental indicators, Firstrand is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with ABSA Bank and Firstrand

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

The idea behind ABSA Bank Limited and Firstrand 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 Competition Analyzer module to analyze and compare many basic indicators for a group of related or unrelated entities.