Correlation Between Bank of China Limited and Sichuan Road

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

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

Diversification Opportunities for Bank of China Limited and Sichuan Road

0.03

Correlation Coefficient

Bank of China Limited  Sichuan Road

Significant diversification

The 3 months correlation between Bank and Sichuan is 0.03. Overlapping area represents the amount of risk that can be diversified away by holding Bank of China and Sichuan Road Bridge in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sichuan Road Bridge and Bank of China Limited 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 China are associated (or correlated) with Sichuan Road. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sichuan Road Bridge has no effect on the direction of Bank of China Limited i.e., Bank of China Limited and Sichuan Road go up and down completely randomly.

Pair Corralation between Bank of China Limited and Sichuan Road

Assuming the 90 days trading horizon Bank of China is expected to under-perform the Sichuan Road. But the stock apears to be less risky and, when comparing its historical volatility, Bank of China is 1.14 times less risky than Sichuan Road. The stock trades about -0.02 of its potential returns per unit of risk. The Sichuan Road Bridge is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  737.00  in Sichuan Road Bridge on December 25, 2024 and sell it today you would earn a total of  74.00  from holding Sichuan Road Bridge or generate 10.04% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	98.28%
Values	Daily Returns

Bank of China  vs.  Sichuan Road Bridge

Bank of China Limited

Risk-Adjusted Performance

Very Weak

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

Sichuan Road Bridge

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Sichuan Road Bridge are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Sichuan Road may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Bank of China Limited and Sichuan Road

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

The idea behind Bank of China and Sichuan Road Bridge 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.