Correlation Between First Financial and Texas Capital

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

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

Diversification Opportunities for First Financial and Texas Capital

0.92

Correlation Coefficient

First Financial  Texas Capital

Almost no diversification

The 3 months correlation between First and Texas is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding First Financial Bankshares and Texas Capital Bancshares in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Texas Capital Bancshares and First Financial 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 Financial Bankshares are associated (or correlated) with Texas Capital. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Texas Capital Bancshares has no effect on the direction of First Financial i.e., First Financial and Texas Capital go up and down completely randomly.

Pair Corralation between First Financial and Texas Capital

Given the investment horizon of 90 days First Financial Bankshares is expected to generate 1.17 times more return on investment than Texas Capital. However, First Financial is 1.17 times more volatile than Texas Capital Bancshares. It trades about 0.02 of its potential returns per unit of risk. Texas Capital Bancshares is currently generating about 0.01 per unit of risk. If you would invest  3,665  in First Financial Bankshares on September 26, 2024 and sell it today you would earn a total of  10.00  from holding First Financial Bankshares or generate 0.27% return on investment over 90 days.

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

First Financial Bankshares  vs.  Texas Capital Bancshares

First Financial Bank

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days First Financial Bankshares has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy forward indicators, First Financial is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Texas Capital Bancshares

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Texas Capital Bancshares are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite fairly weak fundamental drivers, Texas Capital may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with First Financial and Texas Capital

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

The idea behind First Financial Bankshares and Texas Capital 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.

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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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..