Correlation Between Bank of China and Bright Dairy

Can any of the company-specific risk be diversified away by investing in both Bank of China and Bright Dairy 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 and Bright Dairy 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 Bright Dairy Food, you can compare the effects of market volatilities on Bank of China and Bright Dairy 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 with a short position of Bright Dairy. Check out your portfolio center. Please also check ongoing floating volatility patterns of Bank of China and Bright Dairy.

Diversification Opportunities for Bank of China and Bright Dairy

-0.31

Correlation Coefficient

Bank of China  Bright Dairy

Very good diversification

The 3 months correlation between Bank and Bright is -0.31. Overlapping area represents the amount of risk that can be diversified away by holding Bank of China and Bright Dairy Food in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Bright Dairy Food and Bank of China 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 Bright Dairy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Bright Dairy Food has no effect on the direction of Bank of China i.e., Bank of China and Bright Dairy go up and down completely randomly.

Pair Corralation between Bank of China and Bright Dairy

Assuming the 90 days trading horizon Bank of China is expected to generate 0.61 times more return on investment than Bright Dairy. However, Bank of China is 1.63 times less risky than Bright Dairy. It trades about 0.11 of its potential returns per unit of risk. Bright Dairy Food is currently generating about -0.04 per unit of risk. If you would invest  495.00  in Bank of China on October 24, 2024 and sell it today you would earn a total of  36.00  from holding Bank of China or generate 7.27% return on investment over 90 days.

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

Bank of China  vs.  Bright Dairy Food

Bank of China

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Bank of China are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Bank of China may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Bright Dairy Food

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Bright Dairy Food has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Bright Dairy 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 China and Bright Dairy

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

The idea behind Bank of China and Bright Dairy Food 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 Sign In To Macroaxis module to sign in to explore Macroaxis' wealth optimization platform and fintech modules.