Correlation Between First Community and Business First

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

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

Diversification Opportunities for First Community and Business First

0.82

Correlation Coefficient

First Community  Business First

Very poor diversification

The 3 months correlation between First and Business is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding First Community and Business First Bancshares in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Business First 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 are associated (or correlated) with Business First. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Business First Bancshares has no effect on the direction of First Community i.e., First Community and Business First go up and down completely randomly.

Pair Corralation between First Community and Business First

Given the investment horizon of 90 days First Community is expected to generate 1.0 times less return on investment than Business First. But when comparing it to its historical volatility, First Community is 1.33 times less risky than Business First. It trades about 0.16 of its potential returns per unit of risk. Business First Bancshares is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  2,411  in Business First Bancshares on August 31, 2024 and sell it today you would earn a total of  461.00  from holding Business First Bancshares or generate 19.12% return on investment over 90 days.

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

First Community  vs.  Business First Bancshares

First Community

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in First Community are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of very weak fundamental indicators, First Community displayed solid returns over the last few months and may actually be approaching a breakup point.

Business First Bancshares

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Business First Bancshares are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak basic indicators, Business First unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with First Community and Business First

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

The idea behind First Community and Business First 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .