Correlation Between Morgan Stanley and HSBC Holdings

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

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

Diversification Opportunities for Morgan Stanley and HSBC Holdings

0.87

Correlation Coefficient

Morgan Stanley  HSBC Holdings

Very poor diversification

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

Pair Corralation between Morgan Stanley and HSBC Holdings

Given the investment horizon of 90 days Morgan Stanley is expected to generate 2.23 times less return on investment than HSBC Holdings. In addition to that, Morgan Stanley is 1.77 times more volatile than HSBC Holdings PLC. It trades about 0.09 of its total potential returns per unit of risk. HSBC Holdings PLC is currently generating about 0.35 per unit of volatility. If you would invest  72,440  in HSBC Holdings PLC on September 23, 2024 and sell it today you would earn a total of  3,640  from holding HSBC Holdings PLC or generate 5.02% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	95.45%
Values	Daily Returns

Morgan Stanley Direct  vs.  HSBC Holdings PLC

Morgan Stanley Direct

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Morgan Stanley Direct are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite quite inconsistent fundamental indicators, Morgan Stanley may actually be approaching a critical reversion point that can send shares even higher in January 2025.

HSBC Holdings PLC

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in HSBC Holdings PLC are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, HSBC Holdings unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Morgan Stanley and HSBC Holdings

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

The idea behind Morgan Stanley Direct and HSBC Holdings PLC 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.