Correlation Between Home Federal and First Northwest

Can any of the company-specific risk be diversified away by investing in both Home Federal and First Northwest 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 Federal and First Northwest into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Home Federal Bancorp and First Northwest Bancorp, you can compare the effects of market volatilities on Home Federal and First Northwest 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 Federal with a short position of First Northwest. Check out your portfolio center. Please also check ongoing floating volatility patterns of Home Federal and First Northwest.

Diversification Opportunities for Home Federal and First Northwest

0.42

Correlation Coefficient

Home Federal  First Northwest

Very weak diversification

The 3 months correlation between Home and First is 0.42. Overlapping area represents the amount of risk that can be diversified away by holding Home Federal Bancorp and First Northwest Bancorp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Northwest Bancorp and Home Federal 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 Federal Bancorp are associated (or correlated) with First Northwest. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First Northwest Bancorp has no effect on the direction of Home Federal i.e., Home Federal and First Northwest go up and down completely randomly.

Pair Corralation between Home Federal and First Northwest

Given the investment horizon of 90 days Home Federal Bancorp is expected to generate 1.81 times more return on investment than First Northwest. However, Home Federal is 1.81 times more volatile than First Northwest Bancorp. It trades about -0.01 of its potential returns per unit of risk. First Northwest Bancorp is currently generating about -0.05 per unit of risk. If you would invest  1,755  in Home Federal Bancorp on February 1, 2024 and sell it today you would lose (595.00) from holding Home Federal Bancorp or give up 33.9% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.72%
Values	Daily Returns

Home Federal Bancorp  vs.  First Northwest Bancorp

Home Federal Bancorp

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Home Federal Bancorp has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's fundamental drivers remain quite persistent which may send shares a bit higher in June 2024. The latest mess may also be a sign of long-standing up-swing for the company institutional investors.

First Northwest Bancorp

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days First Northwest Bancorp has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's basic indicators remain somewhat strong which may send shares a bit higher in June 2024. The current disturbance may also be a sign of long term up-swing for the company investors.

Pair Trading with Home Federal and First Northwest

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

The idea behind Home Federal Bancorp and First Northwest Bancorp 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.