Correlation Between Bank of America and Natwest Group

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

Diversification Opportunities for Bank of America and Natwest Group

0.67

Correlation Coefficient

Bank of America  Natwest Group

Poor diversification

The 3 months correlation between Bank and Natwest is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding Bank of America and Natwest Group PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Natwest Group PLC 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 Natwest Group. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Natwest Group PLC has no effect on the direction of Bank of America i.e., Bank of America and Natwest Group go up and down completely randomly.

Pair Corralation between Bank of America and Natwest Group

Assuming the 90 days trading horizon Bank of America is expected to generate 6.13 times less return on investment than Natwest Group. But when comparing it to its historical volatility, Bank of America is 2.41 times less risky than Natwest Group. It trades about 0.07 of its potential returns per unit of risk. Natwest Group PLC is currently generating about 0.19 of returns per unit of risk over similar time horizon. If you would invest  882.00  in Natwest Group PLC on September 12, 2024 and sell it today you would earn a total of  176.50  from holding Natwest Group PLC or generate 20.01% return on investment over 90 days.

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

Bank of America  vs.  Natwest Group PLC

Bank of America

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Bank of America are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite fairly strong essential indicators, Bank of America is not utilizing all of its potentials. The current stock price confusion, may contribute to short-horizon losses for the traders.

Natwest Group PLC

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Natwest Group PLC are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Natwest Group reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Bank of America and Natwest Group

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

The idea behind Bank of America and Natwest Group PLC 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.

Check out your portfolio center.

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.