Correlation Between Bank of America and Valero Energy

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

Diversification Opportunities for Bank of America and Valero Energy

0.23

Correlation Coefficient

Bank of America  Valero Energy

Modest diversification

The 3 months correlation between Bank and Valero is 0.23. Overlapping area represents the amount of risk that can be diversified away by holding Bank of America and Valero Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Valero Energy 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 Valero Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Valero Energy has no effect on the direction of Bank of America i.e., Bank of America and Valero Energy go up and down completely randomly.

Pair Corralation between Bank of America and Valero Energy

Assuming the 90 days trading horizon Bank of America is expected to under-perform the Valero Energy. But the stock apears to be less risky and, when comparing its historical volatility, Bank of America is 1.81 times less risky than Valero Energy. The stock trades about -0.02 of its potential returns per unit of risk. The Valero Energy is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  236,541  in Valero Energy on December 26, 2024 and sell it today you would earn a total of  26,359  from holding Valero Energy or generate 11.14% return on investment over 90 days.

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

Bank of America  vs.  Valero Energy

Bank of America

Risk-Adjusted Performance

Very Weak

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

Valero Energy

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Valero Energy are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Valero Energy showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Bank of America and Valero Energy

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

The idea behind Bank of America and Valero Energy 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 Money Managers module to screen money managers from public funds and ETFs managed around the world.