Correlation Between Regional Bank and Banking Portfolio

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

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

Diversification Opportunities for Regional Bank and Banking Portfolio

1.0

Correlation Coefficient

Regional Bank  Banking Portfolio

No risk reduction

The 3 months correlation between Regional and Banking is 1.0. Overlapping area represents the amount of risk that can be diversified away by holding Regional Bank Fund and Banking Portfolio Banking in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Banking Portfolio Banking and Regional 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 Regional Bank Fund are associated (or correlated) with Banking Portfolio. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Banking Portfolio Banking has no effect on the direction of Regional Bank i.e., Regional Bank and Banking Portfolio go up and down completely randomly.

Pair Corralation between Regional Bank and Banking Portfolio

Assuming the 90 days horizon Regional Bank is expected to generate 1.46 times less return on investment than Banking Portfolio. In addition to that, Regional Bank is 1.03 times more volatile than Banking Portfolio Banking. It trades about 0.04 of its total potential returns per unit of risk. Banking Portfolio Banking is currently generating about 0.05 per unit of volatility. If you would invest  2,325  in Banking Portfolio Banking on September 12, 2024 and sell it today you would earn a total of  1,124  from holding Banking Portfolio Banking or generate 48.34% return on investment over 90 days.

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

Regional Bank Fund  vs.  Banking Portfolio Banking

Regional Bank

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Regional Bank Fund are ranked lower than 11 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Regional Bank showed solid returns over the last few months and may actually be approaching a breakup point.

Banking Portfolio Banking

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Banking Portfolio Banking are ranked lower than 13 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental drivers, Banking Portfolio showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Regional Bank and Banking Portfolio

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

The idea behind Regional Bank Fund and Banking Portfolio Banking 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.

Check out your portfolio center.

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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.