Correlation Between Washington Trust and Northwest Bancshares

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

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

Diversification Opportunities for Washington Trust and Northwest Bancshares

0.91

Correlation Coefficient

Washington Trust  Northwest Bancshares

Almost no diversification

The 3 months correlation between Washington and Northwest is 0.91. Overlapping area represents the amount of risk that can be diversified away by holding Washington Trust Bancorp and Northwest Bancshares in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northwest Bancshares and Washington Trust 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 Washington Trust Bancorp 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 Washington Trust i.e., Washington Trust and Northwest Bancshares go up and down completely randomly.

Pair Corralation between Washington Trust and Northwest Bancshares

Given the investment horizon of 90 days Washington Trust Bancorp is expected to generate 1.46 times more return on investment than Northwest Bancshares. However, Washington Trust is 1.46 times more volatile than Northwest Bancshares. It trades about -0.12 of its potential returns per unit of risk. Northwest Bancshares is currently generating about -0.18 per unit of risk. If you would invest  3,648  in Washington Trust Bancorp on November 29, 2024 and sell it today you would lose (520.00) from holding Washington Trust Bancorp or give up 14.25% of portfolio value over 90 days.

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

Washington Trust Bancorp  vs.  Northwest Bancshares

Washington Trust Bancorp

Risk-Adjusted Performance

Very Weak

Over the last 90 days Washington Trust Bancorp 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 basic indicators 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.

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 Washington Trust and Northwest Bancshares

The main advantage of trading using opposite Washington Trust and Northwest Bancshares positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Washington Trust 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 Washington Trust Bancorp 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.