Correlation Between Bank of America and Wells Fargo

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

Diversification Opportunities for Bank of America and Wells Fargo

0.96

Correlation Coefficient

Bank of America  Wells Fargo

Almost no diversification

The 3 months correlation between Bank and Wells is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Bank of America and Wells Fargo in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Wells Fargo 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 Wells Fargo. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Wells Fargo has no effect on the direction of Bank of America i.e., Bank of America and Wells Fargo go up and down completely randomly.

Pair Corralation between Bank of America and Wells Fargo

Assuming the 90 days trading horizon Bank of America is expected to under-perform the Wells Fargo. But the preferred stock apears to be less risky and, when comparing its historical volatility, Bank of America is 1.04 times less risky than Wells Fargo. The preferred stock trades about -0.06 of its potential returns per unit of risk. The Wells Fargo is currently generating about -0.02 of returns per unit of risk over similar time horizon. If you would invest  1,925  in Wells Fargo on August 31, 2024 and sell it today you would lose (30.00) from holding Wells Fargo or give up 1.56% of portfolio value over 90 days.

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

Bank of America  vs.  Wells Fargo

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. Even with relatively invariable fundamental indicators, Bank of America is not utilizing all of its potentials. The newest stock price agitation, may contribute to short-term losses for the retail investors.

Wells Fargo

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Wells Fargo has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound fundamental indicators, Wells Fargo is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Bank of America and Wells Fargo

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

The idea behind Bank of America and Wells Fargo 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 Portfolio Dashboard module to portfolio dashboard that provides centralized access to all your investments.