Correlation Between HSBC Holdings and Wells Fargo

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

By analyzing existing cross correlation between HSBC Holdings plc and Wells Fargo, you can compare the effects of market volatilities on HSBC Holdings and Wells Fargo 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 HSBC Holdings with a short position of Wells Fargo. Check out your portfolio center. Please also check ongoing floating volatility patterns of HSBC Holdings and Wells Fargo.

Diversification Opportunities for HSBC Holdings and Wells Fargo

0.88

Correlation Coefficient

HSBC Holdings  Wells Fargo

Very poor diversification

The 3 months correlation between HSBC and Wells is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding HSBC Holdings plc and Wells Fargo in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Wells Fargo and HSBC Holdings 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 HSBC Holdings plc are associated (or correlated) with Wells Fargo. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Wells Fargo has no effect on the direction of HSBC Holdings i.e., HSBC Holdings and Wells Fargo go up and down completely randomly.

Pair Corralation between HSBC Holdings and Wells Fargo

Assuming the 90 days trading horizon HSBC Holdings is expected to generate 1.95 times less return on investment than Wells Fargo. But when comparing it to its historical volatility, HSBC Holdings plc is 2.12 times less risky than Wells Fargo. It trades about 0.24 of its potential returns per unit of risk. Wells Fargo is currently generating about 0.22 of returns per unit of risk over similar time horizon. If you would invest  4,775  in Wells Fargo on September 15, 2024 and sell it today you would earn a total of  1,950  from holding Wells Fargo or generate 40.84% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.48%
Values	Daily Returns

HSBC Holdings plc  vs.  Wells Fargo

HSBC Holdings plc

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in HSBC Holdings plc are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain basic indicators, HSBC Holdings exhibited solid returns over the last few months and may actually be approaching a breakup point.

Wells Fargo

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Wells Fargo are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Wells Fargo unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with HSBC Holdings and Wells Fargo

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

The idea behind HSBC Holdings plc and Wells Fargo 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.

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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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.