Correlation Between First American and Assured Guaranty

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

By analyzing existing cross correlation between First American Financial and Assured Guaranty, you can compare the effects of market volatilities on First American and Assured Guaranty 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 First American with a short position of Assured Guaranty. Check out your portfolio center. Please also check ongoing floating volatility patterns of First American and Assured Guaranty.

Diversification Opportunities for First American and Assured Guaranty

0.33

Correlation Coefficient

First American  Assured Guaranty

Weak diversification

The 3 months correlation between First and Assured is 0.33. Overlapping area represents the amount of risk that can be diversified away by holding First American Financial and Assured Guaranty in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Assured Guaranty and First American 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 First American Financial are associated (or correlated) with Assured Guaranty. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Assured Guaranty has no effect on the direction of First American i.e., First American and Assured Guaranty go up and down completely randomly.

Pair Corralation between First American and Assured Guaranty

Assuming the 90 days horizon First American is expected to generate 1.09 times less return on investment than Assured Guaranty. But when comparing it to its historical volatility, First American Financial is 2.09 times less risky than Assured Guaranty. It trades about 0.03 of its potential returns per unit of risk. Assured Guaranty is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  8,168  in Assured Guaranty on December 28, 2024 and sell it today you would earn a total of  32.00  from holding Assured Guaranty or generate 0.39% return on investment over 90 days.

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

First American Financial  vs.  Assured Guaranty

First American Financial

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in First American Financial are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, First American is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

Assured Guaranty

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Assured Guaranty are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Assured Guaranty is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with First American and Assured Guaranty

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

The idea behind First American Financial and Assured Guaranty 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.