Correlation Between Financial Institutions and Prosperity Bancshares

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

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

Diversification Opportunities for Financial Institutions and Prosperity Bancshares

0.65

Correlation Coefficient

Financial Institutions  Prosperity Bancshares

Poor diversification

The 3 months correlation between Financial and Prosperity is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding Financial Institutions and Prosperity Bancshares in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Prosperity Bancshares and Financial Institutions 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 Financial Institutions are associated (or correlated) with Prosperity Bancshares. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Prosperity Bancshares has no effect on the direction of Financial Institutions i.e., Financial Institutions and Prosperity Bancshares go up and down completely randomly.

Pair Corralation between Financial Institutions and Prosperity Bancshares

Given the investment horizon of 90 days Financial Institutions is expected to under-perform the Prosperity Bancshares. In addition to that, Financial Institutions is 1.23 times more volatile than Prosperity Bancshares. It trades about -0.06 of its total potential returns per unit of risk. Prosperity Bancshares is currently generating about -0.06 per unit of volatility. If you would invest  7,451  in Prosperity Bancshares on December 30, 2024 and sell it today you would lose (399.00) from holding Prosperity Bancshares or give up 5.35% of portfolio value over 90 days.

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

Financial Institutions  vs.  Prosperity Bancshares

Financial Institutions

Risk-Adjusted Performance

Very Weak

Over the last 90 days Financial Institutions has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong basic indicators, Financial Institutions is not utilizing all of its potentials. The recent stock price confusion, may contribute to short-horizon losses for the traders.

Prosperity Bancshares

Risk-Adjusted Performance

Very Weak

Over the last 90 days Prosperity Bancshares has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong fundamental drivers, Prosperity Bancshares is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Financial Institutions and Prosperity Bancshares

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

The idea behind Financial Institutions and Prosperity 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.

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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 My Watchlist Analysis module to analyze my current watchlist and to refresh optimization strategy. Macroaxis watchlist is based on self-learning algorithm to remember stocks you like.