Correlation Between Prosperity Bancshares and Northwest Bancshares

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

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

Diversification Opportunities for Prosperity Bancshares and Northwest Bancshares

0.8

Correlation Coefficient

Prosperity Bancshares  Northwest Bancshares

Very poor diversification

The 3 months correlation between Prosperity and Northwest is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Prosperity Bancshares and Northwest Bancshares in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northwest Bancshares and Prosperity Bancshares 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 Prosperity Bancshares are associated (or correlated) with Northwest Bancshares. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northwest Bancshares has no effect on the direction of Prosperity Bancshares i.e., Prosperity Bancshares and Northwest Bancshares go up and down completely randomly.

Pair Corralation between Prosperity Bancshares and Northwest Bancshares

Allowing for the 90-day total investment horizon Prosperity Bancshares is expected to generate 0.87 times more return on investment than Northwest Bancshares. However, Prosperity Bancshares is 1.15 times less risky than Northwest Bancshares. It trades about -0.11 of its potential returns per unit of risk. Northwest Bancshares is currently generating about -0.18 per unit of risk. If you would invest  8,313  in Prosperity Bancshares on November 29, 2024 and sell it today you would lose (647.00) from holding Prosperity Bancshares or give up 7.78% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.33%
Values	Daily Returns

Prosperity Bancshares  vs.  Northwest Bancshares

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 latest fragile performance, the Stock's fundamental drivers remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Northwest Bancshares

Risk-Adjusted Performance

Very Weak

Over the last 90 days Northwest Bancshares has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's fundamental drivers remain fairly strong which may send shares a bit higher in March 2025. The recent confusion may also be a sign of long-lasting up-swing for the firm traders.

Pair Trading with Prosperity Bancshares and Northwest Bancshares

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

The idea behind Prosperity Bancshares and Northwest 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.