Correlation Between Regional Bank and Core Bond

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

By analyzing existing cross correlation between Regional Bank Fund and Core Bond Fund, you can compare the effects of market volatilities on Regional Bank and Core Bond 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 Regional Bank with a short position of Core Bond. Check out your portfolio center. Please also check ongoing floating volatility patterns of Regional Bank and Core Bond.

Diversification Opportunities for Regional Bank and Core Bond

-0.53

Correlation Coefficient

Regional Bank  Core Bond

Excellent diversification

The 3 months correlation between Regional and Core is -0.53. Overlapping area represents the amount of risk that can be diversified away by holding Regional Bank Fund and Core Bond Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Core Bond Fund and Regional Bank 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 Regional Bank Fund are associated (or correlated) with Core Bond. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Core Bond Fund has no effect on the direction of Regional Bank i.e., Regional Bank and Core Bond go up and down completely randomly.

Pair Corralation between Regional Bank and Core Bond

Assuming the 90 days horizon Regional Bank Fund is expected to under-perform the Core Bond. In addition to that, Regional Bank is 3.3 times more volatile than Core Bond Fund. It trades about -0.29 of its total potential returns per unit of risk. Core Bond Fund is currently generating about -0.17 per unit of volatility. If you would invest  1,092  in Core Bond Fund on September 22, 2024 and sell it today you would lose (16.00) from holding Core Bond Fund or give up 1.47% of portfolio value over 90 days.

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

Regional Bank Fund  vs.  Core Bond Fund

Regional Bank

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Regional Bank Fund are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Regional Bank may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Core Bond Fund

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Core Bond Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong fundamental indicators, Core Bond is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Regional Bank and Core Bond

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

The idea behind Regional Bank Fund and Core Bond Fund 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.