Correlation Between Wells Fargo and Bank of America

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

Diversification Opportunities for Wells Fargo and Bank of America

0.88
  Correlation Coefficient

Very poor diversification

The 3 months correlation between Wells and Bank is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Wells Fargo and Bank of America in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Bank of America and Wells Fargo 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 Wells Fargo are associated (or correlated) with Bank of America. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Bank of America has no effect on the direction of Wells Fargo i.e., Wells Fargo and Bank of America go up and down completely randomly.

Pair Corralation between Wells Fargo and Bank of America

Considering the 90-day investment horizon Wells Fargo is expected to under-perform the Bank of America. But the stock apears to be less risky and, when comparing its historical volatility, Wells Fargo is 1.13 times less risky than Bank of America. The stock trades about -0.17 of its potential returns per unit of risk. The Bank of America is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  3,929  in Bank of America on March 18, 2024 and sell it today you would earn a total of  39.00  from holding Bank of America or generate 0.99% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy61.11%
ValuesDaily Returns

Wells Fargo  vs.  Bank of America

 Performance 
       Timeline  
Wells Fargo 

Risk-Adjusted Performance

4 of 100

 
Weak
 
Strong
Insignificant
Compared to the overall equity markets, risk-adjusted returns on investments in Wells Fargo are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound technical and fundamental indicators, Wells Fargo is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.
Bank of America 

Risk-Adjusted Performance

11 of 100

 
Weak
 
Strong
Good
Compared to the overall equity markets, risk-adjusted returns on investments in Bank of America are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak basic indicators, Bank of America exhibited solid returns over the last few months and may actually be approaching a breakup point.

Wells Fargo and Bank of America Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Wells Fargo and Bank of America

The main advantage of trading using opposite Wells Fargo and Bank of America positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Wells Fargo position performs unexpectedly, Bank of America 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 Bank of America will offset losses from the drop in Bank of America's long position.
The idea behind Wells Fargo and Bank of America 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.
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 the Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..

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