Correlation Between Wells Fargo and Verizon Communications

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

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

Diversification Opportunities for Wells Fargo and Verizon Communications

0.53

Correlation Coefficient

Wells Fargo  Verizon Communications

Very weak diversification

The 3 months correlation between Wells and Verizon is 0.53. Overlapping area represents the amount of risk that can be diversified away by holding Wells Fargo and Verizon Communications in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Verizon Communications and Wells Fargo 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 Wells Fargo are associated (or correlated) with Verizon Communications. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Verizon Communications has no effect on the direction of Wells Fargo i.e., Wells Fargo and Verizon Communications go up and down completely randomly.

Pair Corralation between Wells Fargo and Verizon Communications

Assuming the 90 days trading horizon Wells Fargo is expected to generate 0.45 times more return on investment than Verizon Communications. However, Wells Fargo is 2.22 times less risky than Verizon Communications. It trades about -0.04 of its potential returns per unit of risk. Verizon Communications is currently generating about -0.22 per unit of risk. If you would invest  147,000  in Wells Fargo on October 11, 2024 and sell it today you would lose (800.00) from holding Wells Fargo or give up 0.54% of portfolio value over 90 days.

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

Wells Fargo  vs.  Verizon Communications

Wells Fargo

Risk-Adjusted Performance

11 of 100

Good

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

Verizon Communications

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Verizon Communications has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong primary indicators, Verizon Communications is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Wells Fargo and Verizon Communications

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

The idea behind Wells Fargo and Verizon Communications 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.