Correlation Between Mainstreet Bank and International Bancshares

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

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

Diversification Opportunities for Mainstreet Bank and International Bancshares

-0.31

Correlation Coefficient

Mainstreet Bank  International Bancshares

Very good diversification

The 3 months correlation between Mainstreet and International is -0.31. Overlapping area represents the amount of risk that can be diversified away by holding Mainstreet Bank and International Bancshares in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on International Bancshares and Mainstreet 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 Mainstreet Bank are associated (or correlated) with International Bancshares. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of International Bancshares has no effect on the direction of Mainstreet Bank i.e., Mainstreet Bank and International Bancshares go up and down completely randomly.

Pair Corralation between Mainstreet Bank and International Bancshares

Given the investment horizon of 90 days Mainstreet Bank is expected to under-perform the International Bancshares. But the stock apears to be less risky and, when comparing its historical volatility, Mainstreet Bank is 1.13 times less risky than International Bancshares. The stock trades about -0.05 of its potential returns per unit of risk. The International Bancshares is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  6,279  in International Bancshares on December 30, 2024 and sell it today you would lose (7.00) from holding International Bancshares or give up 0.11% of portfolio value over 90 days.

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

Mainstreet Bank  vs.  International Bancshares

Mainstreet Bank

Risk-Adjusted Performance

Very Weak

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

International Bancshares

Risk-Adjusted Performance

Very Weak

Over the last 90 days International Bancshares has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, International Bancshares is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Mainstreet Bank and International Bancshares

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

The idea behind Mainstreet Bank and International 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.