Correlation Between Bank of America and Connecticut Light

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

Diversification Opportunities for Bank of America and Connecticut Light

-0.18

Correlation Coefficient

Bank of America  Connecticut Light

Good diversification

The 3 months correlation between Bank and Connecticut is -0.18. Overlapping area represents the amount of risk that can be diversified away by holding Bank of America and The Connecticut Light in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Connecticut Light 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 Connecticut Light. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Connecticut Light has no effect on the direction of Bank of America i.e., Bank of America and Connecticut Light go up and down completely randomly.

Pair Corralation between Bank of America and Connecticut Light

Considering the 90-day investment horizon Bank of America is expected to under-perform the Connecticut Light. In addition to that, Bank of America is 1.28 times more volatile than The Connecticut Light. It trades about -0.05 of its total potential returns per unit of risk. The Connecticut Light is currently generating about 0.03 per unit of volatility. If you would invest  3,551  in The Connecticut Light on December 29, 2024 and sell it today you would earn a total of  49.00  from holding The Connecticut Light or generate 1.38% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	93.44%
Values	Daily Returns

Bank of America  vs.  The Connecticut Light

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 rather sound basic indicators, Bank of America is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

Connecticut Light

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in The Connecticut Light are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable basic indicators, Connecticut Light is not utilizing all of its potentials. The recent stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with Bank of America and Connecticut Light

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

The idea behind Bank of America and The Connecticut Light 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.