Correlation Between East West and Encore Capital

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

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

Diversification Opportunities for East West and Encore Capital

0.86

Correlation Coefficient

East West  Encore Capital

Very poor diversification

The 3 months correlation between East and Encore is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding East West Bancorp and Encore Capital Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Encore Capital Group and East 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 East West Bancorp are associated (or correlated) with Encore Capital. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Encore Capital Group has no effect on the direction of East West i.e., East West and Encore Capital go up and down completely randomly.

Pair Corralation between East West and Encore Capital

Given the investment horizon of 90 days East West Bancorp is expected to under-perform the Encore Capital. In addition to that, East West is 1.18 times more volatile than Encore Capital Group. It trades about -0.07 of its total potential returns per unit of risk. Encore Capital Group is currently generating about -0.08 per unit of volatility. If you would invest  4,997  in Encore Capital Group on October 9, 2024 and sell it today you would lose (219.00) from holding Encore Capital Group or give up 4.38% of portfolio value over 90 days.

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

East West Bancorp  vs.  Encore Capital Group

East West Bancorp

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in East West Bancorp are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain fundamental drivers, East West exhibited solid returns over the last few months and may actually be approaching a breakup point.

Encore Capital Group

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Encore Capital Group are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady basic indicators, Encore Capital may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with East West and Encore Capital

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

The idea behind East West Bancorp and Encore Capital Group 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.