Correlation Between Community West and ESSA Bancorp

Can any of the company-specific risk be diversified away by investing in both Community West and ESSA Bancorp 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 Community West and ESSA Bancorp into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Community West Bancshares and ESSA Bancorp, you can compare the effects of market volatilities on Community West and ESSA Bancorp 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 Community West with a short position of ESSA Bancorp. Check out your portfolio center. Please also check ongoing floating volatility patterns of Community West and ESSA Bancorp.

Diversification Opportunities for Community West and ESSA Bancorp

0.54

Correlation Coefficient

Community West  ESSA Bancorp

Very weak diversification

The 3 months correlation between Community and ESSA is 0.54. Overlapping area represents the amount of risk that can be diversified away by holding Community West Bancshares and ESSA Bancorp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ESSA Bancorp and Community West 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 Community West Bancshares are associated (or correlated) with ESSA Bancorp. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ESSA Bancorp has no effect on the direction of Community West i.e., Community West and ESSA Bancorp go up and down completely randomly.

Pair Corralation between Community West and ESSA Bancorp

Given the investment horizon of 90 days Community West Bancshares is expected to under-perform the ESSA Bancorp. But the stock apears to be less risky and, when comparing its historical volatility, Community West Bancshares is 1.13 times less risky than ESSA Bancorp. The stock trades about -0.03 of its potential returns per unit of risk. The ESSA Bancorp is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  1,913  in ESSA Bancorp on December 29, 2024 and sell it today you would earn a total of  18.00  from holding ESSA Bancorp or generate 0.94% return on investment over 90 days.

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

Community West Bancshares  vs.  ESSA Bancorp

Community West Bancshares

Risk-Adjusted Performance

Very Weak

Over the last 90 days Community West Bancshares has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound fundamental drivers, Community West is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

ESSA Bancorp

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in ESSA Bancorp are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, ESSA Bancorp is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Community West and ESSA Bancorp

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

The idea behind Community West Bancshares and ESSA Bancorp 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.