Correlation Between Bank of Communications and China Telecom

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

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

Diversification Opportunities for Bank of Communications and China Telecom

0.76

Correlation Coefficient

Bank of Communications  China Telecom

Poor diversification

The 3 months correlation between Bank and China is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding Bank of Communications and China Telecom Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Telecom Corp and Bank of Communications 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 Bank of Communications are associated (or correlated) with China Telecom. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Telecom Corp has no effect on the direction of Bank of Communications i.e., Bank of Communications and China Telecom go up and down completely randomly.

Pair Corralation between Bank of Communications and China Telecom

Assuming the 90 days trading horizon Bank of Communications is expected to under-perform the China Telecom. But the stock apears to be less risky and, when comparing its historical volatility, Bank of Communications is 1.15 times less risky than China Telecom. The stock trades about 0.0 of its potential returns per unit of risk. The China Telecom Corp is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  666.00  in China Telecom Corp on October 20, 2024 and sell it today you would earn a total of  28.00  from holding China Telecom Corp or generate 4.2% return on investment over 90 days.

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

Bank of Communications  vs.  China Telecom Corp

Bank of Communications

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Bank of Communications has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Bank of Communications is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

China Telecom Corp

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in China Telecom Corp are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, China Telecom is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Bank of Communications and China Telecom

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

The idea behind Bank of Communications and China Telecom Corp 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.

Check out your portfolio center.

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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.