Correlation Between East West and Provident Financial

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

Diversification Opportunities for East West and Provident Financial

0.72

Correlation Coefficient

East West  Provident Financial

Poor diversification

The 3 months correlation between East and Provident is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding East West Bancorp and Provident Financial Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Provident Financial 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 Provident Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Provident Financial has no effect on the direction of East West i.e., East West and Provident Financial go up and down completely randomly.

Pair Corralation between East West and Provident Financial

Given the investment horizon of 90 days East West Bancorp is expected to generate 1.56 times more return on investment than Provident Financial. However, East West is 1.56 times more volatile than Provident Financial Holdings. It trades about 0.03 of its potential returns per unit of risk. Provident Financial Holdings is currently generating about 0.03 per unit of risk. If you would invest  7,404  in East West Bancorp on October 3, 2024 and sell it today you would earn a total of  2,172  from holding East West Bancorp or generate 29.34% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	99.58%
Values	Daily Returns

East West Bancorp  vs.  Provident Financial Holdings

East West Bancorp

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in East West Bancorp are ranked lower than 10 (%) 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.

Provident Financial

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Provident Financial Holdings are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of fairly conflicting basic indicators, Provident Financial may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with East West and Provident Financial

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

The idea behind East West Bancorp and Provident Financial Holdings 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.