Correlation Between First Community and First Financial

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

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

Diversification Opportunities for First Community and First Financial

0.62

Correlation Coefficient

First Community  First Financial

Poor diversification

The 3 months correlation between First and First is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding First Community Bancshares and First Financial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Financial and First Community 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 First Community Bancshares are associated (or correlated) with First Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First Financial has no effect on the direction of First Community i.e., First Community and First Financial go up and down completely randomly.

Pair Corralation between First Community and First Financial

Given the investment horizon of 90 days First Community Bancshares is expected to under-perform the First Financial. But the stock apears to be less risky and, when comparing its historical volatility, First Community Bancshares is 1.03 times less risky than First Financial. The stock trades about -0.08 of its potential returns per unit of risk. The First Financial is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  4,749  in First Financial on January 30, 2025 and sell it today you would earn a total of  257.00  from holding First Financial or generate 5.41% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	100.0%
Values	Daily Returns

First Community Bancshares  vs.  First Financial

First Community Banc

Risk-Adjusted Performance

Very Weak

Over the last 90 days First Community Bancshares has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest conflicting performance, the Stock's fundamental drivers remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

First Financial

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in First Financial are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile technical and fundamental indicators, First Financial may actually be approaching a critical reversion point that can send shares even higher in May 2025.

Pair Trading with First Community and First Financial

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

The idea behind First Community Bancshares and First Financial 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.