Correlation Between East West and Southern

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

Diversification Opportunities for East West and Southern

-0.34

Correlation Coefficient

East West  Southern

Very good diversification

The 3 months correlation between East and Southern is -0.34. Overlapping area represents the amount of risk that can be diversified away by holding East West Bancorp and Southern Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Southern 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 Southern. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Southern has no effect on the direction of East West i.e., East West and Southern go up and down completely randomly.

Pair Corralation between East West and Southern

Given the investment horizon of 90 days East West Bancorp is expected to under-perform the Southern. In addition to that, East West is 1.85 times more volatile than Southern Co. It trades about -0.19 of its total potential returns per unit of risk. Southern Co is currently generating about -0.13 per unit of volatility. If you would invest  2,293  in Southern Co on October 9, 2024 and sell it today you would lose (47.00) from holding Southern Co or give up 2.05% of portfolio value over 90 days.

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

East West Bancorp  vs.  Southern Co

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.

Southern

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Southern Co has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Preferred Stock's forward-looking indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Pair Trading with East West and Southern

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

The idea behind East West Bancorp and Southern Co 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.