Correlation Between China Merchants and Banco Do

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

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

Diversification Opportunities for China Merchants and Banco Do

0.87

Correlation Coefficient

China Merchants  Banco Do

Very poor diversification

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

Pair Corralation between China Merchants and Banco Do

Assuming the 90 days horizon China Merchants is expected to generate 1.33 times less return on investment than Banco Do. In addition to that, China Merchants is 1.28 times more volatile than Banco Do Brasil. It trades about 0.03 of its total potential returns per unit of risk. Banco Do Brasil is currently generating about 0.06 per unit of volatility. If you would invest  304.00  in Banco Do Brasil on December 1, 2024 and sell it today you would earn a total of  171.00  from holding Banco Do Brasil or generate 56.25% return on investment over 90 days.

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

China Merchants Bank  vs.  Banco Do Brasil

China Merchants Bank

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Bank are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile forward-looking signals, China Merchants showed solid returns over the last few months and may actually be approaching a breakup point.

Banco Do Brasil

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Banco Do Brasil are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Banco Do showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Merchants and Banco Do

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

The idea behind China Merchants Bank and Banco Do Brasil 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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.