Correlation Between Bank of America and InterContinental

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

By analyzing existing cross correlation between Verizon Communications and InterContinental Hotels Group, you can compare the effects of market volatilities on Bank of America and InterContinental 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 InterContinental. Check out your portfolio center. Please also check ongoing floating volatility patterns of Bank of America and InterContinental.

Diversification Opportunities for Bank of America and InterContinental

0.4

Correlation Coefficient

Bank of America  InterContinental

Very weak diversification

The 3 months correlation between Bank and InterContinental is 0.4. Overlapping area represents the amount of risk that can be diversified away by holding Verizon Communications and InterContinental Hotels Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on InterContinental Hotels 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 Verizon Communications are associated (or correlated) with InterContinental. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of InterContinental Hotels has no effect on the direction of Bank of America i.e., Bank of America and InterContinental go up and down completely randomly.

Pair Corralation between Bank of America and InterContinental

Assuming the 90 days trading horizon Verizon Communications is expected to under-perform the InterContinental. But the stock apears to be less risky and, when comparing its historical volatility, Verizon Communications is 1.24 times less risky than InterContinental. The stock trades about -0.01 of its potential returns per unit of risk. The InterContinental Hotels Group is currently generating about 0.21 of returns per unit of risk over similar time horizon. If you would invest  9,850  in InterContinental Hotels Group on September 24, 2024 and sell it today you would earn a total of  2,150  from holding InterContinental Hotels Group or generate 21.83% return on investment over 90 days.

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

Verizon Communications  vs.  InterContinental Hotels Group

Verizon Communications

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Verizon Communications has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable fundamental indicators, Bank of America is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

InterContinental Hotels

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in InterContinental Hotels Group are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, InterContinental reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Bank of America and InterContinental

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

The idea behind Verizon Communications and InterContinental Hotels Group 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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.