Correlation Between Preferred Bank and Farmers Bank

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

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

Diversification Opportunities for Preferred Bank and Farmers Bank

0.08

Correlation Coefficient

Preferred Bank  Farmers Bank

Significant diversification

The 3 months correlation between Preferred and Farmers is 0.08. Overlapping area represents the amount of risk that can be diversified away by holding Preferred Bank and The Farmers Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Farmers Bank and Preferred 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 Preferred Bank are associated (or correlated) with Farmers Bank. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Farmers Bank has no effect on the direction of Preferred Bank i.e., Preferred Bank and Farmers Bank go up and down completely randomly.

Pair Corralation between Preferred Bank and Farmers Bank

Given the investment horizon of 90 days Preferred Bank is expected to under-perform the Farmers Bank. But the stock apears to be less risky and, when comparing its historical volatility, Preferred Bank is 1.06 times less risky than Farmers Bank. The stock trades about -0.05 of its potential returns per unit of risk. The The Farmers Bank is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  2,178  in The Farmers Bank on December 2, 2024 and sell it today you would earn a total of  107.00  from holding The Farmers Bank or generate 4.91% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	93.44%
Values	Daily Returns

Preferred Bank  vs.  The Farmers Bank

Preferred Bank

Risk-Adjusted Performance

Very Weak

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

Farmers Bank

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in The Farmers Bank are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Farmers Bank is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Preferred Bank and Farmers Bank

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

The idea behind Preferred Bank and The Farmers Bank 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..