Correlation Between Bank of America and Emerson Electric

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

Diversification Opportunities for Bank of America and Emerson Electric

0.86

Correlation Coefficient

Bank of America  Emerson Electric

Very poor diversification

The 3 months correlation between Bank and Emerson is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Bank of America and Emerson Electric Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Emerson Electric 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 Emerson Electric. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Emerson Electric has no effect on the direction of Bank of America i.e., Bank of America and Emerson Electric go up and down completely randomly.

Pair Corralation between Bank of America and Emerson Electric

Considering the 90-day investment horizon Bank of America is expected to generate 0.96 times more return on investment than Emerson Electric. However, Bank of America is 1.05 times less risky than Emerson Electric. It trades about -0.05 of its potential returns per unit of risk. Emerson Electric Co is currently generating about -0.11 per unit of risk. If you would invest  4,363  in Bank of America on December 28, 2024 and sell it today you would lose (238.00) from holding Bank of America or give up 5.45% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.39%
Values	Daily Returns

Bank of America  vs.  Emerson Electric Co

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 latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Emerson Electric

Risk-Adjusted Performance

Very Weak

Over the last 90 days Emerson Electric Co has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Pair Trading with Bank of America and Emerson Electric

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

The idea behind Bank of America and Emerson Electric Co 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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.