Correlation Between Bank of China and China Everbright

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

Diversification Opportunities for Bank of China and China Everbright

0.87

Correlation Coefficient

Bank of China  China Everbright

Very poor diversification

The 3 months correlation between Bank and China is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Bank of China and China Everbright Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Everbright Bank 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 Everbright. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Everbright Bank has no effect on the direction of Bank of China i.e., Bank of China and China Everbright go up and down completely randomly.

Pair Corralation between Bank of China and China Everbright

Assuming the 90 days trading horizon Bank of China is expected to generate 0.99 times more return on investment than China Everbright. However, Bank of China is 1.01 times less risky than China Everbright. It trades about 0.09 of its potential returns per unit of risk. China Everbright Bank is currently generating about 0.06 per unit of risk. If you would invest  368.00  in Bank of China on October 22, 2024 and sell it today you would earn a total of  177.00  from holding Bank of China or generate 48.1% return on investment over 90 days.

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

Bank of China  vs.  China Everbright Bank

Bank of China

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Bank of China are ranked lower than 12 (%) 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.

China Everbright Bank

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in China Everbright Bank are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, China Everbright may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Bank of China and China Everbright

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

The idea behind Bank of China and China Everbright Bank 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.