Correlation Between Bank of America and FirstRand

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

Diversification Opportunities for Bank of America and FirstRand

-0.13

Correlation Coefficient

Bank of America  FirstRand

Good diversification

The 3 months correlation between Bank and FirstRand is -0.13. Overlapping area represents the amount of risk that can be diversified away by holding Bank of America and FirstRand Ltd ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on FirstRand ADR 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 FirstRand. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of FirstRand ADR has no effect on the direction of Bank of America i.e., Bank of America and FirstRand go up and down completely randomly.

Pair Corralation between Bank of America and FirstRand

Assuming the 90 days trading horizon Bank of America is expected to under-perform the FirstRand. But the preferred stock apears to be less risky and, when comparing its historical volatility, Bank of America is 7.46 times less risky than FirstRand. The preferred stock trades about -0.01 of its potential returns per unit of risk. The FirstRand Ltd ADR is currently generating about 0.0 of returns per unit of risk over similar time horizon. If you would invest  4,582  in FirstRand Ltd ADR on September 17, 2024 and sell it today you would lose (69.00) from holding FirstRand Ltd ADR or give up 1.51% of portfolio value over 90 days.

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

Bank of America  vs.  FirstRand Ltd ADR

Bank of America

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Bank of America has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent fundamental indicators, Bank of America is not utilizing all of its potentials. The current stock price mess, may contribute to short-term losses for the institutional investors.

FirstRand ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days FirstRand Ltd ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong fundamental indicators, FirstRand is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Bank of America and FirstRand

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

The idea behind Bank of America and FirstRand Ltd ADR 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.