Correlation Between Toronto Dominion and Eastern Bankshares

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

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

Diversification Opportunities for Toronto Dominion and Eastern Bankshares

-0.63

Correlation Coefficient

Toronto Dominion  Eastern Bankshares

Excellent diversification

The 3 months correlation between Toronto and Eastern is -0.63. Overlapping area represents the amount of risk that can be diversified away by holding Toronto Dominion Bank and Eastern Bankshares in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Eastern Bankshares and Toronto Dominion 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 Toronto Dominion Bank are associated (or correlated) with Eastern Bankshares. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Eastern Bankshares has no effect on the direction of Toronto Dominion i.e., Toronto Dominion and Eastern Bankshares go up and down completely randomly.

Pair Corralation between Toronto Dominion and Eastern Bankshares

Allowing for the 90-day total investment horizon Toronto Dominion Bank is expected to generate 1.7 times more return on investment than Eastern Bankshares. However, Toronto Dominion is 1.7 times more volatile than Eastern Bankshares. It trades about -0.11 of its potential returns per unit of risk. Eastern Bankshares is currently generating about -0.19 per unit of risk. If you would invest  5,614  in Toronto Dominion Bank on September 13, 2024 and sell it today you would lose (229.00) from holding Toronto Dominion Bank or give up 4.08% of portfolio value over 90 days.

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

Toronto Dominion Bank  vs.  Eastern Bankshares

Toronto Dominion Bank

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Toronto Dominion Bank has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unsteady performance in the last few months, the Stock's fundamental indicators remain rather sound which may send shares a bit higher in January 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Eastern Bankshares

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Eastern Bankshares are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak fundamental drivers, Eastern Bankshares exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Toronto Dominion and Eastern Bankshares

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

The idea behind Toronto Dominion Bank and Eastern Bankshares 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 Latest Portfolios module to quick portfolio dashboard that showcases your latest portfolios.