Correlation Between First Business and First Northwest

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

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

Diversification Opportunities for First Business and First Northwest

0.5

Correlation Coefficient

First Business  First Northwest

Very weak diversification

The 3 months correlation between First and First is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding First Business Financial and First Northwest Bancorp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Northwest Bancorp and First Business 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 First Business Financial are associated (or correlated) with First Northwest. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First Northwest Bancorp has no effect on the direction of First Business i.e., First Business and First Northwest go up and down completely randomly.

Pair Corralation between First Business and First Northwest

Given the investment horizon of 90 days First Business Financial is expected to under-perform the First Northwest. But the stock apears to be less risky and, when comparing its historical volatility, First Business Financial is 1.05 times less risky than First Northwest. The stock trades about -0.23 of its potential returns per unit of risk. The First Northwest Bancorp is currently generating about -0.05 of returns per unit of risk over similar time horizon. If you would invest  1,073  in First Northwest Bancorp on September 21, 2024 and sell it today you would lose (22.50) from holding First Northwest Bancorp or give up 2.1% of portfolio value over 90 days.

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

First Business Financial  vs.  First Northwest Bancorp

First Business Financial

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in First Business Financial are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong forward indicators, First Business is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

First Northwest Bancorp

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days First Northwest Bancorp has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, First Northwest is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with First Business and First Northwest

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

The idea behind First Business Financial and First Northwest Bancorp 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 Piotroski F Score module to get Piotroski F Score based on the binary analysis strategy of nine different fundamentals.