Correlation Between Bank of America and Toronto Dominion

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

Diversification Opportunities for Bank of America and Toronto Dominion

0.45

Correlation Coefficient

Bank of America  Toronto Dominion

Very weak diversification

The 3 months correlation between Bank and Toronto is 0.45. Overlapping area represents the amount of risk that can be diversified away by holding Bank of America and Toronto Dominion Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Toronto Dominion Bank 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 Toronto Dominion. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Toronto Dominion Bank has no effect on the direction of Bank of America i.e., Bank of America and Toronto Dominion go up and down completely randomly.

Pair Corralation between Bank of America and Toronto Dominion

Considering the 90-day investment horizon Bank of America is expected to under-perform the Toronto Dominion. But the stock apears to be less risky and, when comparing its historical volatility, Bank of America is 1.16 times less risky than Toronto Dominion. The stock trades about -0.1 of its potential returns per unit of risk. The Toronto Dominion Bank is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  5,575  in Toronto Dominion Bank on November 28, 2024 and sell it today you would earn a total of  385.00  from holding Toronto Dominion Bank or generate 6.91% return on investment over 90 days.

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

Bank of America  vs.  Toronto Dominion Bank

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 latest unsteady performance, the Stock's basic indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Toronto Dominion Bank

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Toronto Dominion Bank are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of rather unfluctuating fundamental indicators, Toronto Dominion may actually be approaching a critical reversion point that can send shares even higher in March 2025.

Pair Trading with Bank of America and Toronto Dominion

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

The idea behind Bank of America and Toronto Dominion Bank 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 FinTech Suite module to use AI to screen and filter profitable investment opportunities.