Correlation Between First National and North American

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

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

Diversification Opportunities for First National and North American

0.49

Correlation Coefficient

First National  North American

Very weak diversification

The 3 months correlation between First and North is 0.49. Overlapping area represents the amount of risk that can be diversified away by holding First National Financial and North American Financial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on North American Financial and First National 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 National Financial are associated (or correlated) with North American. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of North American Financial has no effect on the direction of First National i.e., First National and North American go up and down completely randomly.

Pair Corralation between First National and North American

Assuming the 90 days trading horizon First National is expected to generate 7.63 times less return on investment than North American. But when comparing it to its historical volatility, First National Financial is 1.33 times less risky than North American. It trades about 0.06 of its potential returns per unit of risk. North American Financial is currently generating about 0.32 of returns per unit of risk over similar time horizon. If you would invest  567.00  in North American Financial on September 2, 2024 and sell it today you would earn a total of  185.00  from holding North American Financial or generate 32.63% return on investment over 90 days.

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

First National Financial  vs.  North American Financial

First National Financial

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in First National Financial are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable basic indicators, First National is not utilizing all of its potentials. The recent stock price uproar, may contribute to short-horizon losses for the private investors.

North American Financial

Risk-Adjusted Performance

25 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in North American Financial are ranked lower than 25 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, North American displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with First National and North American

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

The idea behind First National Financial and North American Financial 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 Economic Indicators module to top statistical indicators that provide insights into how an economy is performing.