Correlation Between Bank of China and China State

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

Diversification Opportunities for Bank of China and China State

0.65

Correlation Coefficient

Bank of China  China State

Poor diversification

The 3 months correlation between Bank and China is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding Bank of China and China State Construction in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China State Construction 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 China State. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China State Construction has no effect on the direction of Bank of China i.e., Bank of China and China State go up and down completely randomly.

Pair Corralation between Bank of China and China State

Assuming the 90 days trading horizon Bank of China is expected to generate 4.49 times less return on investment than China State. But when comparing it to its historical volatility, Bank of China is 1.93 times less risky than China State. It trades about 0.04 of its potential returns per unit of risk. China State Construction is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  528.00  in China State Construction on August 31, 2024 and sell it today you would earn a total of  69.00  from holding China State Construction or generate 13.07% return on investment over 90 days.

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

Bank of China  vs.  China State Construction

Bank of China

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Bank of China are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Bank of China is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

China State Construction

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in China State Construction are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, China State sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Bank of China and China State

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

The idea behind Bank of China and China State Construction 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 Bonds Directory module to find actively traded corporate debentures issued by US companies.