Correlation Between Bank of America and Dongfeng

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

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

Diversification Opportunities for Bank of America and Dongfeng

0.75

Correlation Coefficient

Bank of America  Dongfeng

Poor diversification

The 3 months correlation between Bank and Dongfeng is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Bank of America and Dongfeng Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dongfeng Group and Bank of America 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 America are associated (or correlated) with Dongfeng. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dongfeng Group has no effect on the direction of Bank of America i.e., Bank of America and Dongfeng go up and down completely randomly.

Pair Corralation between Bank of America and Dongfeng

Considering the 90-day investment horizon Bank of America is expected to under-perform the Dongfeng. But the stock apears to be less risky and, when comparing its historical volatility, Bank of America is 8.47 times less risky than Dongfeng. The stock trades about -0.23 of its potential returns per unit of risk. The Dongfeng Group is currently generating about 0.28 of returns per unit of risk over similar time horizon. If you would invest  35.00  in Dongfeng Group on September 20, 2024 and sell it today you would earn a total of  20.00  from holding Dongfeng Group or generate 57.14% return on investment over 90 days.

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

Bank of America  vs.  Dongfeng Group

Bank of America

Risk-Adjusted Performance

6 of 100

OK

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

Dongfeng Group

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Dongfeng Group are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. Despite nearly abnormal technical and fundamental indicators, Dongfeng reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Bank of America and Dongfeng

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

The idea behind Bank of America and Dongfeng Group 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.