Correlation Between Home Federal and China Merchants

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

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

Diversification Opportunities for Home Federal and China Merchants

0.1

Correlation Coefficient

Home Federal  China Merchants

Average diversification

The 3 months correlation between Home and China is 0.1. Overlapping area represents the amount of risk that can be diversified away by holding Home Federal Bancorp and China Merchants Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Merchants Bank and Home Federal 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 Home Federal Bancorp are associated (or correlated) with China Merchants. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Merchants Bank has no effect on the direction of Home Federal i.e., Home Federal and China Merchants go up and down completely randomly.

Pair Corralation between Home Federal and China Merchants

Given the investment horizon of 90 days Home Federal Bancorp is expected to generate 18.54 times more return on investment than China Merchants. However, Home Federal is 18.54 times more volatile than China Merchants Bank. It trades about 0.04 of its potential returns per unit of risk. China Merchants Bank is currently generating about 0.01 per unit of risk. If you would invest  1,711  in Home Federal Bancorp on September 20, 2024 and sell it today you would lose (451.00) from holding Home Federal Bancorp or give up 26.36% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	90.51%
Values	Daily Returns

Home Federal Bancorp  vs.  China Merchants Bank

Home Federal Bancorp

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Home Federal Bancorp has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile performance, the Stock's fundamental drivers remain persistent and the latest mess on Wall Street may also be a sign of long-standing gains for the company institutional investors.

China Merchants Bank

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Bank are ranked lower than 7 (%) 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.

Pair Trading with Home Federal and China Merchants

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

The idea behind Home Federal Bancorp and China Merchants 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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.