Correlation Between Bank of America and Prudential Financial

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

Diversification Opportunities for Bank of America and Prudential Financial

0.9

Correlation Coefficient

Bank of America  Prudential Financial

Almost no diversification

The 3 months correlation between Bank and Prudential is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Bank of America 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 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 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 America i.e., Bank of America and Prudential Financial go up and down completely randomly.

Pair Corralation between Bank of America and Prudential Financial

Assuming the 90 days trading horizon Bank of America is expected to generate 1.02 times more return on investment than Prudential Financial. However, Bank of America is 1.02 times more volatile than Prudential Financial. It trades about 0.26 of its potential returns per unit of risk. Prudential Financial is currently generating about 0.18 per unit of risk. If you would invest  5,404  in Bank of America on September 12, 2024 and sell it today you would earn a total of  1,664  from holding Bank of America or generate 30.79% return on investment over 90 days.

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

Bank of America  vs.  Prudential Financial

Bank of America

Risk-Adjusted Performance

20 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Bank of America are ranked lower than 20 (%) 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.

Prudential Financial

Risk-Adjusted Performance

13 of 100

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. Despite somewhat weak fundamental indicators, Prudential Financial sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Bank of America and Prudential Financial

The main advantage of trading using opposite Bank of America and Prudential Financial positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Bank of America 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 Bank of America 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.

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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 CEOs Directory module to screen CEOs from public companies around the world.