Correlation Between Bank of America and Canadian Tire

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

Diversification Opportunities for Bank of America and Canadian Tire

0.34

Correlation Coefficient

Bank of America  Canadian Tire

Weak diversification

The 3 months correlation between Bank and Canadian is 0.34. Overlapping area represents the amount of risk that can be diversified away by holding Bank of America and Canadian Tire in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Canadian Tire 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 Canadian Tire. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Canadian Tire has no effect on the direction of Bank of America i.e., Bank of America and Canadian Tire go up and down completely randomly.

Pair Corralation between Bank of America and Canadian Tire

Considering the 90-day investment horizon Bank of America is expected to generate 0.72 times more return on investment than Canadian Tire. However, Bank of America is 1.39 times less risky than Canadian Tire. It trades about 0.04 of its potential returns per unit of risk. Canadian Tire is currently generating about -0.03 per unit of risk. If you would invest  4,581  in Bank of America on November 20, 2024 and sell it today you would earn a total of  115.00  from holding Bank of America or generate 2.51% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	96.72%
Values	Daily Returns

Bank of America  vs.  Canadian Tire

Bank of America

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Bank of America are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. 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.

Canadian Tire

Risk-Adjusted Performance

Very Weak

Over the last 90 days Canadian Tire has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Canadian Tire is not utilizing all of its potentials. The recent stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Bank of America and Canadian Tire

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

The idea behind Bank of America and Canadian Tire 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.