Correlation Between Home Bancshares and BSE

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Can any of the company-specific risk be diversified away by investing in both Home Bancshares and BSE 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 Home Bancshares and BSE into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Home Bancshares and BSE, you can compare the effects of market volatilities on Home Bancshares and BSE 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 Home Bancshares with a short position of BSE. Check out your portfolio center. Please also check ongoing floating volatility patterns of Home Bancshares and BSE.

Diversification Opportunities for Home Bancshares and BSE

0.87
  Correlation Coefficient

Very poor diversification

The 3 months correlation between Home Bancshares and BSE is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Home Bancshares and BSE in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BSE and Home Bancshares 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 Home Bancshares are associated (or correlated) with BSE. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BSE has no effect on the direction of Home Bancshares i.e., Home Bancshares and BSE go up and down completely randomly.
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Pair Corralation between Home Bancshares and BSE

Given the investment horizon of 90 days Home Bancshares is expected to generate 1.85 times more return on investment than BSE. However, Home Bancshares is 1.85 times more volatile than BSE. It trades about 0.19 of its potential returns per unit of risk. BSE is currently generating about -0.08 per unit of risk. If you would invest  2,230  in Home Bancshares on July 7, 2022 and sell it today you would earn a total of  166.00  from holding Home Bancshares or generate 7.44% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy95.65%
ValuesDaily Returns

Home Bancshares  vs.  BSE

 Performance (%) 
       Timeline  

Home Bancshares and BSE Volatility Contrast

   Predicted Return Density   
       Returns  

Home Bancshares

Pair trading matchups for Home Bancshares

BSE

Pair trading matchups for BSE

The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against BSE as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. BSE's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, BSE's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to BSE.

Pair Trading with Home Bancshares and BSE

The main advantage of trading using opposite Home Bancshares and BSE positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Home Bancshares position performs unexpectedly, BSE 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 BSE will offset losses from the drop in BSE's long position.
Home Bancshares vs. Amazon Inc
The idea behind Home Bancshares and BSE 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.
The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against BSE as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. BSE's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, BSE's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to BSE.
Check out your portfolio center. 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 Portfolio Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.

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