Correlation Between Capital One and Verizon Communications

Can any of the company-specific risk be diversified away by investing in both Capital One and Verizon Communications 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 Capital One and Verizon Communications into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Capital One Financial and Verizon Communications, you can compare the effects of market volatilities on Capital One and Verizon Communications 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 Capital One with a short position of Verizon Communications. Check out your portfolio center. Please also check ongoing floating volatility patterns of Capital One and Verizon Communications.

Diversification Opportunities for Capital One and Verizon Communications

-0.21

Correlation Coefficient

Capital One  Verizon Communications

Very good diversification

The 3 months correlation between Capital and Verizon is -0.21. Overlapping area represents the amount of risk that can be diversified away by holding Capital One Financial and Verizon Communications in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Verizon Communications and Capital One 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 Capital One Financial are associated (or correlated) with Verizon Communications. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Verizon Communications has no effect on the direction of Capital One i.e., Capital One and Verizon Communications go up and down completely randomly.

Pair Corralation between Capital One and Verizon Communications

Assuming the 90 days trading horizon Capital One Financial is expected to under-perform the Verizon Communications. But the stock apears to be less risky and, when comparing its historical volatility, Capital One Financial is 1.1 times less risky than Verizon Communications. The stock trades about -0.02 of its potential returns per unit of risk. The Verizon Communications is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  79,383  in Verizon Communications on December 30, 2024 and sell it today you would earn a total of  12,917  from holding Verizon Communications or generate 16.27% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.41%
Values	Daily Returns

Capital One Financial  vs.  Verizon Communications

Capital One Financial

Risk-Adjusted Performance

Very Weak

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

Verizon Communications

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Verizon Communications are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak primary indicators, Verizon Communications showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Capital One and Verizon Communications

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

The idea behind Capital One Financial and Verizon Communications 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.