Correlation Between Farmers Bank and Preferred Bank

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

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

Diversification Opportunities for Farmers Bank and Preferred Bank

0.03

Correlation Coefficient

Farmers Bank  Preferred Bank

Significant diversification

The 3 months correlation between Farmers and Preferred is 0.03. Overlapping area represents the amount of risk that can be diversified away by holding The Farmers Bank and Preferred Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Preferred Bank and Farmers Bank 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 The Farmers Bank 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 Farmers Bank i.e., Farmers Bank and Preferred Bank go up and down completely randomly.

Pair Corralation between Farmers Bank and Preferred Bank

Given the investment horizon of 90 days The Farmers Bank is expected to generate 0.9 times more return on investment than Preferred Bank. However, The Farmers Bank is 1.11 times less risky than Preferred Bank. It trades about 0.02 of its potential returns per unit of risk. Preferred Bank is currently generating about -0.02 per unit of risk. If you would invest  2,300  in The Farmers Bank on December 30, 2024 and sell it today you would earn a total of  25.00  from holding The Farmers Bank or generate 1.09% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	98.39%
Values	Daily Returns

The Farmers Bank  vs.  Preferred Bank

Farmers Bank

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in The Farmers Bank are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Farmers Bank is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the 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 Farmers Bank and Preferred Bank

The main advantage of trading using opposite Farmers Bank and Preferred Bank positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Farmers Bank 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 The Farmers Bank 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.