Correlation Between Main Street and Mainstreet Bank

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

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

Diversification Opportunities for Main Street and Mainstreet Bank

0.4

Correlation Coefficient

Main Street  Mainstreet Bank

Very weak diversification

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

Pair Corralation between Main Street and Mainstreet Bank

Given the investment horizon of 90 days Main Street is expected to generate 1.14 times less return on investment than Mainstreet Bank. But when comparing it to its historical volatility, Main Street Financial is 1.91 times less risky than Mainstreet Bank. It trades about 0.11 of its potential returns per unit of risk. Mainstreet Bank is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  1,705  in Mainstreet Bank on September 3, 2024 and sell it today you would earn a total of  154.00  from holding Mainstreet Bank or generate 9.03% return on investment over 90 days.

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

Main Street Financial  vs.  Mainstreet Bank

Main Street Financial

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Main Street Financial are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of fairly unfluctuating basic indicators, Main Street may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Mainstreet Bank

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Mainstreet Bank are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Mainstreet Bank may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Main Street and Mainstreet Bank

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

The idea behind Main Street Financial and Mainstreet Bank 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 Piotroski F Score module to get Piotroski F Score based on the binary analysis strategy of nine different fundamentals.