Correlation Between Southern California and North Dallas

Can any of the company-specific risk be diversified away by investing in both Southern California and North Dallas 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 Southern California and North Dallas into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Southern California Bancorp and North Dallas Bank, you can compare the effects of market volatilities on Southern California and North Dallas 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 Southern California with a short position of North Dallas. Check out your portfolio center. Please also check ongoing floating volatility patterns of Southern California and North Dallas.

Diversification Opportunities for Southern California and North Dallas

0.89

Correlation Coefficient

Southern California  North Dallas

Very poor diversification

The 3 months correlation between Southern and North is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Southern California Bancorp and North Dallas Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on North Dallas Bank and Southern California 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 Southern California Bancorp are associated (or correlated) with North Dallas. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of North Dallas Bank has no effect on the direction of Southern California i.e., Southern California and North Dallas go up and down completely randomly.

Pair Corralation between Southern California and North Dallas

Given the investment horizon of 90 days Southern California Bancorp is expected to generate 2.02 times more return on investment than North Dallas. However, Southern California is 2.02 times more volatile than North Dallas Bank. It trades about 0.18 of its potential returns per unit of risk. North Dallas Bank is currently generating about 0.13 per unit of risk. If you would invest  1,484  in Southern California Bancorp on September 2, 2024 and sell it today you would earn a total of  308.00  from holding Southern California Bancorp or generate 20.75% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.44%
Values	Daily Returns

Southern California Bancorp  vs.  North Dallas Bank

Southern California

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Southern California Bancorp are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Despite quite inconsistent basic indicators, Southern California disclosed solid returns over the last few months and may actually be approaching a breakup point.

North Dallas Bank

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in North Dallas Bank are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite somewhat unsteady fundamental indicators, North Dallas may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Southern California and North Dallas

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

The idea behind Southern California Bancorp and North Dallas 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.