Correlation Between Canadian Imperial and Toronto Dominion

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

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

Diversification Opportunities for Canadian Imperial and Toronto Dominion

0.11

Correlation Coefficient

Canadian Imperial  Toronto Dominion

Average diversification

The 3 months correlation between Canadian and Toronto is 0.11. Overlapping area represents the amount of risk that can be diversified away by holding Canadian Imperial Bank 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 Canadian Imperial 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 Canadian Imperial Bank 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 Canadian Imperial i.e., Canadian Imperial and Toronto Dominion go up and down completely randomly.

Pair Corralation between Canadian Imperial and Toronto Dominion

Allowing for the 90-day total investment horizon Canadian Imperial Bank is expected to under-perform the Toronto Dominion. But the stock apears to be less risky and, when comparing its historical volatility, Canadian Imperial Bank is 1.08 times less risky than Toronto Dominion. The stock trades about -0.38 of its potential returns per unit of risk. The Toronto Dominion Bank is currently generating about -0.01 of returns per unit of risk over similar time horizon. If you would invest  5,948  in Toronto Dominion Bank on February 1, 2024 and sell it today you would lose (16.00) from holding Toronto Dominion Bank or give up 0.27% of portfolio value over 90 days.

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

Canadian Imperial Bank  vs.  Toronto Dominion Bank

Canadian Imperial Bank

Risk-Adjusted Performance

5 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Canadian Imperial Bank are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy primary indicators, Canadian Imperial is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the 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 rather sound fundamental indicators, Toronto Dominion is not utilizing all of its potentials. The recent stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Canadian Imperial and Toronto Dominion

The main advantage of trading using opposite Canadian Imperial and Toronto Dominion positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Canadian Imperial 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 Canadian Imperial Bank 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.