Correlation Between American States and Cincinnati Financial

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

By analyzing existing cross correlation between American States Water and Cincinnati Financial Corp, you can compare the effects of market volatilities on American States and Cincinnati Financial 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 American States with a short position of Cincinnati Financial. Check out your portfolio center. Please also check ongoing floating volatility patterns of American States and Cincinnati Financial.

Diversification Opportunities for American States and Cincinnati Financial

0.72

Correlation Coefficient

American States  Cincinnati Financial

Poor diversification

The 3 months correlation between American and Cincinnati is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding American States Water and Cincinnati Financial Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cincinnati Financial Corp and American States 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 American States Water are associated (or correlated) with Cincinnati Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cincinnati Financial Corp has no effect on the direction of American States i.e., American States and Cincinnati Financial go up and down completely randomly.

Pair Corralation between American States and Cincinnati Financial

Assuming the 90 days horizon American States Water is expected to under-perform the Cincinnati Financial. But the stock apears to be less risky and, when comparing its historical volatility, American States Water is 1.07 times less risky than Cincinnati Financial. The stock trades about -0.13 of its potential returns per unit of risk. The Cincinnati Financial Corp is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  13,760  in Cincinnati Financial Corp on October 7, 2024 and sell it today you would earn a total of  10.00  from holding Cincinnati Financial Corp or generate 0.07% return on investment over 90 days.

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

American States Water  vs.  Cincinnati Financial Corp

American States Water

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days American States Water has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, American States is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Cincinnati Financial Corp

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Cincinnati Financial Corp are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively fragile basic indicators, Cincinnati Financial may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with American States and Cincinnati Financial

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

The idea behind American States Water and Cincinnati Financial Corp 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 Stocks Directory module to find actively traded stocks across global markets.