Correlation Between Bank of Nova Scotia and Prudential Financial

Can any of the company-specific risk be diversified away by investing in both Bank of Nova Scotia and Prudential Financial 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 Nova Scotia and Prudential Financial into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between The Bank of and Prudential Financial, you can compare the effects of market volatilities on Bank of Nova Scotia and Prudential Financial 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 Nova Scotia with a short position of Prudential Financial. Check out your portfolio center. Please also check ongoing floating volatility patterns of Bank of Nova Scotia and Prudential Financial.

Diversification Opportunities for Bank of Nova Scotia and Prudential Financial

-0.48

Correlation Coefficient

Bank of Nova Scotia  Prudential Financial

Very good diversification

The 3 months correlation between Bank and Prudential is -0.48. Overlapping area represents the amount of risk that can be diversified away by holding The Bank of and Prudential Financial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Prudential Financial and Bank of Nova Scotia 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 The Bank of are associated (or correlated) with Prudential Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Prudential Financial has no effect on the direction of Bank of Nova Scotia i.e., Bank of Nova Scotia and Prudential Financial go up and down completely randomly.

Pair Corralation between Bank of Nova Scotia and Prudential Financial

Assuming the 90 days trading horizon The Bank of is expected to under-perform the Prudential Financial. But the stock apears to be less risky and, when comparing its historical volatility, The Bank of is 2.52 times less risky than Prudential Financial. The stock trades about -0.09 of its potential returns per unit of risk. The Prudential Financial is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  199,243  in Prudential Financial on December 30, 2024 and sell it today you would earn a total of  44,757  from holding Prudential Financial or generate 22.46% return on investment over 90 days.

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

The Bank of  vs.  Prudential Financial

Bank of Nova Scotia

Risk-Adjusted Performance

Very Weak

Over the last 90 days The Bank of has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Bank of Nova Scotia is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Prudential Financial

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Prudential Financial are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Prudential Financial showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Bank of Nova Scotia and Prudential Financial

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

The idea behind The Bank of and Prudential Financial 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.