Correlation Between Bank of China Limited and Liuzhou Iron

Can any of the company-specific risk be diversified away by investing in both Bank of China Limited and Liuzhou Iron 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 Liuzhou Iron 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 Liuzhou Iron Steel, you can compare the effects of market volatilities on Bank of China Limited and Liuzhou Iron 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 Liuzhou Iron. Check out your portfolio center. Please also check ongoing floating volatility patterns of Bank of China Limited and Liuzhou Iron.

Diversification Opportunities for Bank of China Limited and Liuzhou Iron

-0.15

Correlation Coefficient

Bank of China Limited  Liuzhou Iron

Good diversification

The 3 months correlation between Bank and Liuzhou is -0.15. Overlapping area represents the amount of risk that can be diversified away by holding Bank of China and Liuzhou Iron Steel in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Liuzhou Iron Steel 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 Liuzhou Iron. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Liuzhou Iron Steel has no effect on the direction of Bank of China Limited i.e., Bank of China Limited and Liuzhou Iron go up and down completely randomly.

Pair Corralation between Bank of China Limited and Liuzhou Iron

Assuming the 90 days trading horizon Bank of China is expected to under-perform the Liuzhou Iron. But the stock apears to be less risky and, when comparing its historical volatility, Bank of China is 1.84 times less risky than Liuzhou Iron. The stock trades about -0.02 of its potential returns per unit of risk. The Liuzhou Iron Steel is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  280.00  in Liuzhou Iron Steel on December 25, 2024 and sell it today you would earn a total of  36.00  from holding Liuzhou Iron Steel or generate 12.86% return on investment over 90 days.

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

Bank of China  vs.  Liuzhou Iron Steel

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.

Liuzhou Iron Steel

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Liuzhou Iron Steel are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Liuzhou Iron sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Bank of China Limited and Liuzhou Iron

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

The idea behind Bank of China and Liuzhou Iron Steel 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.