Correlation Between Bank of America and Lloyds Banking

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

Diversification Opportunities for Bank of America and Lloyds Banking

-0.5

Correlation Coefficient

Bank of America  Lloyds Banking

Very good diversification

The 3 months correlation between Bank and Lloyds is -0.5. Overlapping area represents the amount of risk that can be diversified away by holding Bank of America and Lloyds Banking Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lloyds Banking Group 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 Lloyds Banking. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lloyds Banking Group has no effect on the direction of Bank of America i.e., Bank of America and Lloyds Banking go up and down completely randomly.

Pair Corralation between Bank of America and Lloyds Banking

Assuming the 90 days trading horizon Bank of America is expected to under-perform the Lloyds Banking. But the stock apears to be less risky and, when comparing its historical volatility, Bank of America is 1.51 times less risky than Lloyds Banking. The stock trades about -0.05 of its potential returns per unit of risk. The Lloyds Banking Group is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  1,601  in Lloyds Banking Group on September 25, 2024 and sell it today you would earn a total of  90.00  from holding Lloyds Banking Group or generate 5.62% return on investment over 90 days.

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

Bank of America  vs.  Lloyds Banking Group

Bank of America

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Bank of America are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Bank of America sustained solid returns over the last few months and may actually be approaching a breakup point.

Lloyds Banking Group

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Lloyds Banking Group has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Lloyds Banking is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Bank of America and Lloyds Banking

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

The idea behind Bank of America and Lloyds Banking Group 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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.