Correlation Between Itau Unibanco and China Merchants

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

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

Diversification Opportunities for Itau Unibanco and China Merchants

0.28

Correlation Coefficient

Itau Unibanco  China Merchants

Modest diversification

The 3 months correlation between Itau and China is 0.28. Overlapping area represents the amount of risk that can be diversified away by holding Itau Unibanco Banco 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 Itau Unibanco 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 Itau Unibanco Banco 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 Itau Unibanco i.e., Itau Unibanco and China Merchants go up and down completely randomly.

Pair Corralation between Itau Unibanco and China Merchants

Given the investment horizon of 90 days Itau Unibanco Banco is expected to under-perform the China Merchants. In addition to that, Itau Unibanco is 1.07 times more volatile than China Merchants Bank. It trades about -0.34 of its total potential returns per unit of risk. China Merchants Bank is currently generating about 0.33 per unit of volatility. If you would invest  2,204  in China Merchants Bank on September 27, 2024 and sell it today you would earn a total of  372.00  from holding China Merchants Bank or generate 16.88% return on investment over 90 days.

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

Itau Unibanco Banco  vs.  China Merchants Bank

Itau Unibanco Banco

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Itau Unibanco Banco has generated negative risk-adjusted returns adding no value to investors with long positions. Despite conflicting performance in the last few months, the Stock's basic indicators remain somewhat strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

China Merchants Bank

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Bank are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile forward-looking signals, China Merchants may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Itau Unibanco and China Merchants

The main advantage of trading using opposite Itau Unibanco and China Merchants positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Itau Unibanco 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 Itau Unibanco Banco 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.

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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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.