Correlation Between Community West and Prosperity Bancshares

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

Diversification Opportunities for Community West and Prosperity Bancshares

0.84

Correlation Coefficient

Community West  Prosperity Bancshares

Very poor diversification

The 3 months correlation between Community and Prosperity is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Community West Bancshares and Prosperity Bancshares in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Prosperity Bancshares 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 Prosperity Bancshares. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Prosperity Bancshares has no effect on the direction of Community West i.e., Community West and Prosperity Bancshares go up and down completely randomly.

Pair Corralation between Community West and Prosperity Bancshares

Given the investment horizon of 90 days Community West is expected to generate 1.44 times less return on investment than Prosperity Bancshares. But when comparing it to its historical volatility, Community West Bancshares is 1.12 times less risky than Prosperity Bancshares. It trades about 0.1 of its potential returns per unit of risk. Prosperity Bancshares is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  7,091  in Prosperity Bancshares on September 12, 2024 and sell it today you would earn a total of  1,033  from holding Prosperity Bancshares or generate 14.57% return on investment over 90 days.

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

Community West Bancshares  vs.  Prosperity Bancshares

Community West Bancshares

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Community West Bancshares are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of rather conflicting fundamental drivers, Community West may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Prosperity Bancshares

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Prosperity Bancshares are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite somewhat fragile fundamental drivers, Prosperity Bancshares sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Community West and Prosperity Bancshares

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

The idea behind Community West Bancshares and Prosperity Bancshares 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.

Check out your portfolio center.

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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.