Correlation Between Disney and Potomac Bancshares

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

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

Diversification Opportunities for Disney and Potomac Bancshares

0.72

Correlation Coefficient

Disney  Potomac Bancshares

Poor diversification

The 3 months correlation between Disney and Potomac is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Walt Disney and Potomac Bancshares in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Potomac Bancshares and Disney 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 Walt Disney are associated (or correlated) with Potomac Bancshares. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Potomac Bancshares has no effect on the direction of Disney i.e., Disney and Potomac Bancshares go up and down completely randomly.

Pair Corralation between Disney and Potomac Bancshares

Considering the 90-day investment horizon Walt Disney is expected to generate 0.65 times more return on investment than Potomac Bancshares. However, Walt Disney is 1.53 times less risky than Potomac Bancshares. It trades about 0.23 of its potential returns per unit of risk. Potomac Bancshares is currently generating about 0.1 per unit of risk. If you would invest  8,630  in Walt Disney on August 14, 2024 and sell it today you would earn a total of  1,469  from holding Walt Disney or generate 17.02% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.44%
Values	Daily Returns

Walt Disney  vs.  Potomac Bancshares

Walt Disney

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Walt Disney are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain forward indicators, Disney unveiled solid returns over the last few months and may actually be approaching a breakup point.

Potomac Bancshares

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Potomac Bancshares are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unfluctuating fundamental drivers, Potomac Bancshares may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with Disney and Potomac Bancshares

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

The idea behind Walt Disney and Potomac Bancshares 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.