Correlation Between Natwest Group and China Construction

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

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

Diversification Opportunities for Natwest Group and China Construction

0.83

Correlation Coefficient

Natwest Group  China Construction

Very poor diversification

The 3 months correlation between Natwest and China is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Natwest Group PLC and China Construction Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Construction Bank and Natwest Group 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 Natwest Group PLC are associated (or correlated) with China Construction. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Construction Bank has no effect on the direction of Natwest Group i.e., Natwest Group and China Construction go up and down completely randomly.

Pair Corralation between Natwest Group and China Construction

Considering the 90-day investment horizon Natwest Group PLC is expected to generate 0.67 times more return on investment than China Construction. However, Natwest Group PLC is 1.5 times less risky than China Construction. It trades about 0.16 of its potential returns per unit of risk. China Construction Bank is currently generating about 0.09 per unit of risk. If you would invest  980.00  in Natwest Group PLC on December 22, 2024 and sell it today you would earn a total of  220.00  from holding Natwest Group PLC or generate 22.45% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	95.0%
Values	Daily Returns

Natwest Group PLC  vs.  China Construction Bank

Natwest Group PLC

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Natwest Group PLC are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Natwest Group reported solid returns over the last few months and may actually be approaching a breakup point.

China Construction Bank

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in China Construction Bank are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak technical indicators, China Construction reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Natwest Group and China Construction

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

The idea behind Natwest Group PLC and China Construction 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.