Correlation Between Bank of America and Texas Capital

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

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

Diversification Opportunities for Bank of America and Texas Capital

0.57

Correlation Coefficient

Bank of America  Texas Capital

Very weak diversification

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

Pair Corralation between Bank of America and Texas Capital

Assuming the 90 days trading horizon Bank of America is expected to generate 0.65 times more return on investment than Texas Capital. However, Bank of America is 1.53 times less risky than Texas Capital. It trades about -0.06 of its potential returns per unit of risk. Texas Capital Bancshares is currently generating about -0.05 per unit of risk. If you would invest  2,265  in Bank of America on September 12, 2024 and sell it today you would lose (75.00) from holding Bank of America or give up 3.31% of portfolio value over 90 days.

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

Bank of America  vs.  Texas Capital Bancshares

Bank of America

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Bank of America has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy fundamental indicators, Bank of America is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Texas Capital Bancshares

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Texas Capital Bancshares has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy forward indicators, Texas Capital is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Bank of America and Texas Capital

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

The idea behind Bank of America and Texas Capital Bancshares 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 Latest Portfolios module to quick portfolio dashboard that showcases your latest portfolios.