Correlation Between China Construction and Bank of America

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

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

Diversification Opportunities for China Construction and Bank of America

0.63

Correlation Coefficient

China Construction  Bank of America

Poor diversification

The 3 months correlation between China and Bank is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding China Construction Bank and Bank of America in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Bank of America and China Construction 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 China Construction Bank are associated (or correlated) with Bank of America. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Bank of America has no effect on the direction of China Construction i.e., China Construction and Bank of America go up and down completely randomly.

Pair Corralation between China Construction and Bank of America

Assuming the 90 days horizon China Construction is expected to generate 1.03 times less return on investment than Bank of America. In addition to that, China Construction is 1.49 times more volatile than Bank of America. It trades about 0.14 of its total potential returns per unit of risk. Bank of America is currently generating about 0.21 per unit of volatility. If you would invest  3,477  in Bank of America on September 12, 2024 and sell it today you would earn a total of  929.00  from holding Bank of America or generate 26.72% return on investment over 90 days.

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

China Construction Bank  vs.  Bank of America

China Construction Bank

Risk-Adjusted Performance

10 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in China Construction Bank are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, China Construction reported solid returns over the last few months and may actually be approaching a breakup point.

Bank of America

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Bank of America are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Bank of America reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Construction and Bank of America

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

The idea behind China Construction Bank and Bank of America 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 Piotroski F Score module to get Piotroski F Score based on the binary analysis strategy of nine different fundamentals.