Correlation Between First Financial and Lake Shore

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

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

Diversification Opportunities for First Financial and Lake Shore

-0.35

Correlation Coefficient

First Financial  Lake Shore

Very good diversification

The 3 months correlation between First and Lake is -0.35. Overlapping area represents the amount of risk that can be diversified away by holding First Financial Northwest and Lake Shore Bancorp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lake Shore Bancorp and First Financial 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 Financial Northwest are associated (or correlated) with Lake Shore. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lake Shore Bancorp has no effect on the direction of First Financial i.e., First Financial and Lake Shore go up and down completely randomly.

Pair Corralation between First Financial and Lake Shore

Given the investment horizon of 90 days First Financial is expected to generate 8.18 times less return on investment than Lake Shore. But when comparing it to its historical volatility, First Financial Northwest is 1.52 times less risky than Lake Shore. It trades about 0.01 of its potential returns per unit of risk. Lake Shore Bancorp is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  1,320  in Lake Shore Bancorp on August 30, 2024 and sell it today you would earn a total of  26.00  from holding Lake Shore Bancorp or generate 1.97% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	91.3%
Values	Daily Returns

First Financial Northwest  vs.  Lake Shore Bancorp

First Financial Northwest

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days First Financial Northwest has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, First Financial is not utilizing all of its potentials. The current stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Lake Shore Bancorp

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Lake Shore Bancorp are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite quite conflicting fundamental drivers, Lake Shore may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with First Financial and Lake Shore

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

The idea behind First Financial Northwest and Lake Shore Bancorp 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.