Correlation Between 1st Capital and HMN Financial

Can any of the company-specific risk be diversified away by investing in both 1st Capital and HMN 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 1st Capital and HMN Financial into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between 1st Capital Bank and HMN Financial, you can compare the effects of market volatilities on 1st Capital and HMN 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 1st Capital with a short position of HMN Financial. Check out your portfolio center. Please also check ongoing floating volatility patterns of 1st Capital and HMN Financial.

Diversification Opportunities for 1st Capital and HMN Financial

0.42

Correlation Coefficient

1st Capital  HMN Financial

Very weak diversification

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

Pair Corralation between 1st Capital and HMN Financial

Given the investment horizon of 90 days 1st Capital is expected to generate 1.24 times less return on investment than HMN Financial. But when comparing it to its historical volatility, 1st Capital Bank is 2.66 times less risky than HMN Financial. It trades about 0.29 of its potential returns per unit of risk. HMN Financial is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  1,912  in HMN Financial on September 3, 2024 and sell it today you would earn a total of  887.00  from holding HMN Financial or generate 46.39% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	88.18%
Values	Daily Returns

1st Capital Bank  vs.  HMN Financial

1st Capital Bank

Risk-Adjusted Performance

0 of 100

Very Strong

Over the last 90 days 1st Capital Bank has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat conflicting basic indicators, 1st Capital may actually be approaching a critical reversion point that can send shares even higher in January 2025.

HMN Financial

Risk-Adjusted Performance

0 of 100

Modest

Over the last 90 days HMN Financial has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly unsteady basic indicators, HMN Financial may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with 1st Capital and HMN Financial

The main advantage of trading using opposite 1st Capital and HMN Financial positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if 1st Capital position performs unexpectedly, HMN 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 HMN Financial will offset losses from the drop in HMN Financial's long position.

The idea behind 1st Capital Bank and HMN 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 Portfolio Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.