Correlation Between ECB Bancorp and Preferred Bank

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

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

Diversification Opportunities for ECB Bancorp and Preferred Bank

-0.41

Correlation Coefficient

ECB Bancorp  Preferred Bank

Very good diversification

The 3 months correlation between ECB and Preferred is -0.41. Overlapping area represents the amount of risk that can be diversified away by holding ECB Bancorp and Preferred Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Preferred Bank and ECB Bancorp 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 ECB Bancorp are associated (or correlated) with Preferred Bank. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Preferred Bank has no effect on the direction of ECB Bancorp i.e., ECB Bancorp and Preferred Bank go up and down completely randomly.

Pair Corralation between ECB Bancorp and Preferred Bank

Given the investment horizon of 90 days ECB Bancorp is expected to generate 1.38 times more return on investment than Preferred Bank. However, ECB Bancorp is 1.38 times more volatile than Preferred Bank. It trades about 0.03 of its potential returns per unit of risk. Preferred Bank is currently generating about 0.0 per unit of risk. If you would invest  1,478  in ECB Bancorp on December 28, 2024 and sell it today you would earn a total of  46.50  from holding ECB Bancorp or generate 3.15% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	98.36%
Values	Daily Returns

ECB Bancorp  vs.  Preferred Bank

ECB Bancorp

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in ECB Bancorp are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite quite persistent fundamental drivers, ECB Bancorp is not utilizing all of its potentials. The latest stock price mess, may contribute to short-term losses for the institutional investors.

Preferred Bank

Risk-Adjusted Performance

Very Weak

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

Pair Trading with ECB Bancorp and Preferred Bank

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

The idea behind ECB Bancorp and Preferred Bank 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.