Correlation Between Bank of America and Western Investment

Can any of the company-specific risk be diversified away by investing in both Bank of America and Western Investment 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 Western Investment 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 Western Investment, you can compare the effects of market volatilities on Bank of America and Western Investment 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 Western Investment. Check out your portfolio center. Please also check ongoing floating volatility patterns of Bank of America and Western Investment.

Diversification Opportunities for Bank of America and Western Investment

0.11

Correlation Coefficient

Bank of America  Western Investment

Average diversification

The 3 months correlation between Bank and Western is 0.11. Overlapping area represents the amount of risk that can be diversified away by holding Bank of America and Western Investment in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Western Investment 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 Western Investment. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Western Investment has no effect on the direction of Bank of America i.e., Bank of America and Western Investment go up and down completely randomly.

Pair Corralation between Bank of America and Western Investment

Assuming the 90 days trading horizon Bank of America is expected to generate 2.47 times less return on investment than Western Investment. But when comparing it to its historical volatility, Bank of America is 2.63 times less risky than Western Investment. It trades about 0.12 of its potential returns per unit of risk. Western Investment is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  42.00  in Western Investment on September 26, 2024 and sell it today you would earn a total of  12.00  from holding Western Investment or generate 28.57% return on investment over 90 days.

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

Bank of America  vs.  Western Investment

Bank of America

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Bank of America are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak technical and fundamental indicators, Bank of America may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Western Investment

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Western Investment are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of fairly unfluctuating basic indicators, Western Investment showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Bank of America and Western Investment

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

The idea behind Bank of America and Western Investment 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..