Correlation Between Bank of China and China Construction

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

Diversification Opportunities for Bank of China and China Construction

0.09

Correlation Coefficient

Bank of China  China Construction

Significant diversification

The 3 months correlation between Bank and China is 0.09. Overlapping area represents the amount of risk that can be diversified away by holding Bank of China and China Construction Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Construction 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 Construction. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Construction Bank has no effect on the direction of Bank of China i.e., Bank of China and China Construction go up and down completely randomly.

Pair Corralation between Bank of China and China Construction

Assuming the 90 days horizon Bank of China is expected to generate 0.86 times more return on investment than China Construction. However, Bank of China is 1.17 times less risky than China Construction. It trades about 0.05 of its potential returns per unit of risk. China Construction Bank is currently generating about -0.04 per unit of risk. If you would invest  47.00  in Bank of China on October 21, 2024 and sell it today you would earn a total of  1.00  from holding Bank of China or generate 2.13% return on investment over 90 days.

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

Bank of China  vs.  China Construction Bank

Bank of China

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Bank of China are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable technical indicators, Bank of China is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

China Construction Bank

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in China Construction Bank are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable technical indicators, China Construction is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Bank of China and China Construction

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

The idea behind Bank of China and China Construction 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.