Can any of the company-specific risk be diversified away by investing in both KeyCorp and Fifth Third 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 KeyCorp and Fifth Third into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between KeyCorp and Fifth Third Bancorp, you can compare the effects of market volatilities on KeyCorp and Fifth Third 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 KeyCorp with a short position of Fifth Third. Check out your portfolio center. Please also check ongoing floating volatility patterns of KeyCorp and Fifth Third.
Diversification Opportunities for KeyCorp and Fifth Third
The 3 months correlation between KeyCorp and Fifth is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding KeyCorp and Fifth Third Bancorp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Fifth Third Bancorp and KeyCorp 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 KeyCorp are associated (or correlated) with Fifth Third. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Fifth Third Bancorp has no effect on the direction of KeyCorp i.e., KeyCorp and Fifth Third go up and down completely randomly.
Assuming the 90 days trading horizon KeyCorp is expected to generate 2.23 times more return on investment than Fifth Third. However, KeyCorp is 2.23 times more volatile than Fifth Third Bancorp. It trades about 0.02 of its potential returns per unit of risk. Fifth Third Bancorp is currently generating about 0.03 per unit of risk. If you would invest 2,064 in KeyCorp on March 6, 2024 and sell it today you would earn a total of 4.00 from holding KeyCorp or generate 0.19% return on investment over 90 days.
Over the last 90 days KeyCorp has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent basic indicators, KeyCorp is not utilizing all of its potentials. The new stock price mess, may contribute to short-term losses for the institutional investors.
Over the last 90 days Fifth Third Bancorp has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable fundamental drivers, Fifth Third is not utilizing all of its potentials. The recent stock price agitation, may contribute to short-term losses for the retail investors.