Correlation Between Choice Hotels and Bank of America

Can any of the company-specific risk be diversified away by investing in both Choice Hotels and Bank of America 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 Choice Hotels and Bank of America into the same portfolio, which is an essential part of the fundamental portfolio management process.

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

Diversification Opportunities for Choice Hotels and Bank of America

0.34

Correlation Coefficient

Choice Hotels  Bank of America

Weak diversification

The 3 months correlation between Choice and Bank is 0.34. Overlapping area represents the amount of risk that can be diversified away by holding Choice Hotels International and Verizon Communications in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Verizon Communications and Choice Hotels 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 Choice Hotels International are associated (or correlated) with Bank of America. 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 Choice Hotels i.e., Choice Hotels and Bank of America go up and down completely randomly.

Pair Corralation between Choice Hotels and Bank of America

Assuming the 90 days horizon Choice Hotels International is expected to generate 1.04 times more return on investment than Bank of America. However, Choice Hotels is 1.04 times more volatile than Verizon Communications. It trades about 0.22 of its potential returns per unit of risk. Verizon Communications is currently generating about -0.02 per unit of risk. If you would invest  13,371  in Choice Hotels International on October 21, 2024 and sell it today you would earn a total of  629.00  from holding Choice Hotels International or generate 4.7% return on investment over 90 days.

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

Choice Hotels International  vs.  Verizon Communications

Choice Hotels Intern

Risk-Adjusted Performance

11 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Choice Hotels International are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Choice Hotels reported solid returns over the last few months and may actually be approaching a breakup point.

Verizon Communications

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Verizon Communications has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable fundamental indicators, Bank of America is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Choice Hotels and Bank of America

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

The idea behind Choice Hotels International 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.

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 Global Markets Map module to get a quick overview of global market snapshot using zoomable world map. Drill down to check world indexes.