Correlation Between First Community and Community West

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

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

Diversification Opportunities for First Community and Community West

0.8

Correlation Coefficient

First Community  Community West

Very poor diversification

The 3 months correlation between First and Community is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding First Community Bancshares and Community West Bancshares in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Community West Bancshares and First Community 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 Community Bancshares are associated (or correlated) with Community West. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Community West Bancshares has no effect on the direction of First Community i.e., First Community and Community West go up and down completely randomly.

Pair Corralation between First Community and Community West

Given the investment horizon of 90 days First Community Bancshares is expected to generate 1.68 times more return on investment than Community West. However, First Community is 1.68 times more volatile than Community West Bancshares. It trades about -0.27 of its potential returns per unit of risk. Community West Bancshares is currently generating about -0.57 per unit of risk. If you would invest  4,557  in First Community Bancshares on October 6, 2024 and sell it today you would lose (451.00) from holding First Community Bancshares or give up 9.9% of portfolio value over 90 days.

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

First Community Bancshares  vs.  Community West Bancshares

First Community Banc

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in First Community Bancshares are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound fundamental drivers, First Community is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Community West Bancshares

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Community West Bancshares are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of rather conflicting fundamental drivers, Community West may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with First Community and Community West

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

The idea behind First Community Bancshares and Community West Bancshares 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.

Check out your portfolio center.

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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.