Correlation Between Main Street and Sound Financial

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

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

Diversification Opportunities for Main Street and Sound Financial

0.57

Correlation Coefficient

Main Street  Sound Financial

Very weak diversification

The 3 months correlation between Main and Sound is 0.57. Overlapping area represents the amount of risk that can be diversified away by holding Main Street Financial and Sound Financial Bancorp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sound Financial Bancorp and Main Street 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 Main Street Financial are associated (or correlated) with Sound Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sound Financial Bancorp has no effect on the direction of Main Street i.e., Main Street and Sound Financial go up and down completely randomly.

Pair Corralation between Main Street and Sound Financial

Given the investment horizon of 90 days Main Street Financial is expected to generate 0.58 times more return on investment than Sound Financial. However, Main Street Financial is 1.73 times less risky than Sound Financial. It trades about -0.04 of its potential returns per unit of risk. Sound Financial Bancorp is currently generating about -0.08 per unit of risk. If you would invest  1,426  in Main Street Financial on December 20, 2024 and sell it today you would lose (36.00) from holding Main Street Financial or give up 2.52% of portfolio value over 90 days.

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

Main Street Financial  vs.  Sound Financial Bancorp

Main Street Financial

Risk-Adjusted Performance

Very Weak

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

Sound Financial Bancorp

Risk-Adjusted Performance

Very Weak

Over the last 90 days Sound Financial Bancorp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest fragile performance, the Stock's fundamental drivers remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Pair Trading with Main Street and Sound Financial

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

The idea behind Main Street Financial and Sound Financial 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.

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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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.