Correlation Between Bank of America and Equity Commonwealth

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

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

Diversification Opportunities for Bank of America and Equity Commonwealth

0.51

Correlation Coefficient

Bank of America  Equity Commonwealth

Very weak diversification

The 3 months correlation between Bank and Equity is 0.51. Overlapping area represents the amount of risk that can be diversified away by holding Bank of America and Equity Commonwealth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Equity Commonwealth and Bank of America 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 Bank of America are associated (or correlated) with Equity Commonwealth. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Equity Commonwealth has no effect on the direction of Bank of America i.e., Bank of America and Equity Commonwealth go up and down completely randomly.

Pair Corralation between Bank of America and Equity Commonwealth

Assuming the 90 days trading horizon Bank of America is expected to under-perform the Equity Commonwealth. In addition to that, Bank of America is 1.62 times more volatile than Equity Commonwealth. It trades about -0.2 of its total potential returns per unit of risk. Equity Commonwealth is currently generating about -0.05 per unit of volatility. If you would invest  2,513  in Equity Commonwealth on January 20, 2024 and sell it today you would lose (9.00) from holding Equity Commonwealth or give up 0.36% of portfolio value over 90 days.

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

Bank of America  vs.  Equity Commonwealth

Bank of America

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Bank of America has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent fundamental indicators, Bank of America is not utilizing all of its potentials. The current stock price mess, may contribute to short-term losses for the institutional investors.

Equity Commonwealth

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Equity Commonwealth are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound fundamental indicators, Equity Commonwealth is not utilizing all of its potentials. The recent stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Bank of America and Equity Commonwealth

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

The idea behind Bank of America and Equity Commonwealth 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.