Correlation Between First Community and First United

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

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

Diversification Opportunities for First Community and First United

0.81

Correlation Coefficient

First Community  First United

Very poor diversification

The 3 months correlation between First and First is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding First Community and First United in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First United 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 First United. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First United has no effect on the direction of First Community i.e., First Community and First United go up and down completely randomly.

Pair Corralation between First Community and First United

Given the investment horizon of 90 days First Community is expected to generate 0.74 times more return on investment than First United. However, First Community is 1.36 times less risky than First United. It trades about -0.03 of its potential returns per unit of risk. First United is currently generating about -0.04 per unit of risk. If you would invest  2,379  in First Community on December 28, 2024 and sell it today you would lose (112.00) from holding First Community or give up 4.71% of portfolio value over 90 days.

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

First Community  vs.  First United

First Community

Risk-Adjusted Performance

Very Weak

Over the last 90 days First Community has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy fundamental indicators, First Community is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

First United

Risk-Adjusted Performance

Very Weak

Over the last 90 days First United has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's basic 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 First Community and First United

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

The idea behind First Community and First United 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 Competition Analyzer module to analyze and compare many basic indicators for a group of related or unrelated entities.