Correlation Between Traditions Bank and Potomac Bancshares

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

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

Diversification Opportunities for Traditions Bank and Potomac Bancshares

0.89

Correlation Coefficient

Traditions Bank  Potomac Bancshares

Very poor diversification

The 3 months correlation between Traditions and Potomac is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Traditions Bank and Potomac Bancshares in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Potomac Bancshares and Traditions 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 Traditions Bank are associated (or correlated) with Potomac Bancshares. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Potomac Bancshares has no effect on the direction of Traditions Bank i.e., Traditions Bank and Potomac Bancshares go up and down completely randomly.

Pair Corralation between Traditions Bank and Potomac Bancshares

Given the investment horizon of 90 days Traditions Bank is expected to generate 1.31 times more return on investment than Potomac Bancshares. However, Traditions Bank is 1.31 times more volatile than Potomac Bancshares. It trades about 0.12 of its potential returns per unit of risk. Potomac Bancshares is currently generating about 0.15 per unit of risk. If you would invest  2,698  in Traditions Bank on September 12, 2024 and sell it today you would earn a total of  588.00  from holding Traditions Bank or generate 21.79% return on investment over 90 days.

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

Traditions Bank  vs.  Potomac Bancshares

Traditions Bank

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Traditions Bank are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite quite fragile fundamental drivers, Traditions Bank disclosed solid returns over the last few months and may actually be approaching a breakup point.

Potomac Bancshares

Risk-Adjusted Performance

11 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Potomac Bancshares are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak fundamental drivers, Potomac Bancshares unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Traditions Bank and Potomac Bancshares

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

The idea behind Traditions Bank and Potomac 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.