Correlation Between Preferred Bank and Vale SA

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

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

Diversification Opportunities for Preferred Bank and Vale SA

-0.12

Correlation Coefficient

Preferred Bank  Vale SA

Good diversification

The 3 months correlation between Preferred and Vale is -0.12. Overlapping area represents the amount of risk that can be diversified away by holding Preferred Bank and Vale SA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vale SA and Preferred Bank 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 Preferred Bank are associated (or correlated) with Vale SA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vale SA has no effect on the direction of Preferred Bank i.e., Preferred Bank and Vale SA go up and down completely randomly.

Pair Corralation between Preferred Bank and Vale SA

Assuming the 90 days horizon Preferred Bank is expected to generate 0.87 times more return on investment than Vale SA. However, Preferred Bank is 1.15 times less risky than Vale SA. It trades about -0.23 of its potential returns per unit of risk. Vale SA is currently generating about -0.38 per unit of risk. If you would invest  8,750  in Preferred Bank on October 8, 2024 and sell it today you would lose (450.00) from holding Preferred Bank or give up 5.14% of portfolio value over 90 days.

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

Preferred Bank  vs.  Vale SA

Preferred Bank

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Preferred Bank are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Preferred Bank reported solid returns over the last few months and may actually be approaching a breakup point.

Vale SA

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Vale SA has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's essential indicators remain nearly stable which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with Preferred Bank and Vale SA

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

The idea behind Preferred Bank and Vale SA 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.