Correlation Between Bank of Nova Scotia and Toronto Dominion

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

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

Diversification Opportunities for Bank of Nova Scotia and Toronto Dominion

-0.35

Correlation Coefficient

Bank of Nova Scotia  Toronto Dominion

Very good diversification

The 3 months correlation between Bank and Toronto is -0.35. Overlapping area represents the amount of risk that can be diversified away by holding Bank of Nova and Toronto Dominion Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Toronto Dominion Bank and Bank of Nova Scotia 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 Nova are associated (or correlated) with Toronto Dominion. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Toronto Dominion Bank has no effect on the direction of Bank of Nova Scotia i.e., Bank of Nova Scotia and Toronto Dominion go up and down completely randomly.

Pair Corralation between Bank of Nova Scotia and Toronto Dominion

Considering the 90-day investment horizon Bank of Nova is expected to under-perform the Toronto Dominion. But the stock apears to be less risky and, when comparing its historical volatility, Bank of Nova is 1.58 times less risky than Toronto Dominion. The stock trades about -0.21 of its potential returns per unit of risk. The Toronto Dominion Bank is currently generating about -0.13 of returns per unit of risk over similar time horizon. If you would invest  5,588  in Toronto Dominion Bank on September 27, 2024 and sell it today you would lose (282.00) from holding Toronto Dominion Bank or give up 5.05% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	95.45%
Values	Daily Returns

Bank of Nova  vs.  Toronto Dominion Bank

Bank of Nova Scotia

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Bank of Nova has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Bank of Nova Scotia is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

Toronto Dominion Bank

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Toronto Dominion Bank has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of uncertain performance in the last few months, the Stock's fundamental indicators remain rather sound which may send shares a bit higher in January 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Pair Trading with Bank of Nova Scotia and Toronto Dominion

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

The idea behind Bank of Nova and Toronto Dominion Bank 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.