Correlation Between Regional Bank and Equity Income

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

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

Diversification Opportunities for Regional Bank and Equity Income

0.8

Correlation Coefficient

Regional Bank  Equity Income

Very poor diversification

The 3 months correlation between Regional and Equity is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Regional Bank Fund and Equity Income Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Equity Income and Regional 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 Regional Bank Fund are associated (or correlated) with Equity Income. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Equity Income has no effect on the direction of Regional Bank i.e., Regional Bank and Equity Income go up and down completely randomly.

Pair Corralation between Regional Bank and Equity Income

Assuming the 90 days horizon Regional Bank Fund is expected to generate 2.75 times more return on investment than Equity Income. However, Regional Bank is 2.75 times more volatile than Equity Income Fund. It trades about 0.15 of its potential returns per unit of risk. Equity Income Fund is currently generating about 0.08 per unit of risk. If you would invest  2,206  in Regional Bank Fund on September 14, 2024 and sell it today you would earn a total of  877.00  from holding Regional Bank Fund or generate 39.76% return on investment over 90 days.

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

Regional Bank Fund  vs.  Equity Income Fund

Regional Bank

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Regional Bank Fund are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Regional Bank showed solid returns over the last few months and may actually be approaching a breakup point.

Equity Income

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Equity Income Fund are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Equity Income is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Regional Bank and Equity Income

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

The idea behind Regional Bank Fund and Equity Income Fund 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 ETF Categories module to list of ETF categories grouped based on various criteria, such as the investment strategy or type of investments.