Correlation Between Liberty Northwest and Potomac Bancshares

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

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

Diversification Opportunities for Liberty Northwest and Potomac Bancshares

0.46

Correlation Coefficient

Liberty Northwest  Potomac Bancshares

Very weak diversification

The 3 months correlation between Liberty and Potomac is 0.46. Overlapping area represents the amount of risk that can be diversified away by holding Liberty Northwest Bancorp and Potomac Bancshares in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Potomac Bancshares and Liberty Northwest 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 Liberty Northwest Bancorp are associated (or correlated) with Potomac Bancshares. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Potomac Bancshares has no effect on the direction of Liberty Northwest i.e., Liberty Northwest and Potomac Bancshares go up and down completely randomly.

Pair Corralation between Liberty Northwest and Potomac Bancshares

Given the investment horizon of 90 days Liberty Northwest is expected to generate 4.36 times less return on investment than Potomac Bancshares. But when comparing it to its historical volatility, Liberty Northwest Bancorp is 2.3 times less risky than Potomac Bancshares. It trades about 0.07 of its potential returns per unit of risk. Potomac Bancshares is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  1,407  in Potomac Bancshares on September 3, 2024 and sell it today you would earn a total of  243.00  from holding Potomac Bancshares or generate 17.27% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.46%
Values	Daily Returns

Liberty Northwest Bancorp  vs.  Potomac Bancshares

Liberty Northwest Bancorp

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Liberty Northwest Bancorp are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable basic indicators, Liberty Northwest is not utilizing all of its potentials. The newest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Potomac Bancshares

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Potomac Bancshares are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unfluctuating fundamental drivers, Potomac Bancshares unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Liberty Northwest and Potomac Bancshares

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

The idea behind Liberty Northwest Bancorp and Potomac 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..