Correlation Between Bank of Nova Scotia and US Financial

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

By analyzing existing cross correlation between Bank of Nova and US Financial 15, you can compare the effects of market volatilities on Bank of Nova Scotia and US 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 US Financial. Check out your portfolio center. Please also check ongoing floating volatility patterns of Bank of Nova Scotia and US Financial.

Diversification Opportunities for Bank of Nova Scotia and US Financial

0.82

Correlation Coefficient

Bank of Nova Scotia  US Financial

Very poor diversification

The 3 months correlation between Bank and FTU-PB is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding Bank of Nova and US Financial 15 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on US Financial 15 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 Bank of Nova are associated (or correlated) with US Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of US Financial 15 has no effect on the direction of Bank of Nova Scotia i.e., Bank of Nova Scotia and US Financial go up and down completely randomly.

Pair Corralation between Bank of Nova Scotia and US Financial

Assuming the 90 days trading horizon Bank of Nova is expected to under-perform the US Financial. But the stock apears to be less risky and, when comparing its historical volatility, Bank of Nova is 1.23 times less risky than US Financial. The stock trades about -0.11 of its potential returns per unit of risk. The US Financial 15 is currently generating about -0.02 of returns per unit of risk over similar time horizon. If you would invest  759.00  in US Financial 15 on September 23, 2024 and sell it today you would lose (4.00) from holding US Financial 15 or give up 0.53% of portfolio value over 90 days.

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

Bank of Nova  vs.  US Financial 15

Bank of Nova Scotia

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Bank of Nova are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, Bank of Nova Scotia may actually be approaching a critical reversion point that can send shares even higher in January 2025.

US Financial 15

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in US Financial 15 are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, US Financial sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Bank of Nova Scotia and US Financial

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

The idea behind Bank of Nova and US Financial 15 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.