Correlation Between Pakistan Tobacco and MCB Bank

Can any of the company-specific risk be diversified away by investing in both Pakistan Tobacco and MCB Bank 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 Pakistan Tobacco and MCB Bank into the same portfolio, which is an essential part of the fundamental portfolio management process.

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

Diversification Opportunities for Pakistan Tobacco and MCB Bank

0.36

Correlation Coefficient

Pakistan Tobacco  MCB Bank

Weak diversification

The 3 months correlation between Pakistan and MCB is 0.36. Overlapping area represents the amount of risk that can be diversified away by holding Pakistan Tobacco and MCB Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MCB Bank and Pakistan Tobacco 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 Pakistan Tobacco are associated (or correlated) with MCB Bank. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of MCB Bank has no effect on the direction of Pakistan Tobacco i.e., Pakistan Tobacco and MCB Bank go up and down completely randomly.

Pair Corralation between Pakistan Tobacco and MCB Bank

Assuming the 90 days trading horizon Pakistan Tobacco is expected to under-perform the MCB Bank. But the stock apears to be less risky and, when comparing its historical volatility, Pakistan Tobacco is 1.08 times less risky than MCB Bank. The stock trades about -0.23 of its potential returns per unit of risk. The MCB Bank is currently generating about 0.22 of returns per unit of risk over similar time horizon. If you would invest  26,350  in MCB Bank on October 25, 2024 and sell it today you would earn a total of  2,062  from holding MCB Bank or generate 7.83% return on investment over 90 days.

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

Pakistan Tobacco  vs.  MCB Bank

Pakistan Tobacco

Risk-Adjusted Performance

1 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Pakistan Tobacco are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Pakistan Tobacco is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

MCB Bank

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in MCB Bank are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak basic indicators, MCB Bank reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Pakistan Tobacco and MCB Bank

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

The idea behind Pakistan Tobacco and MCB 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 FinTech Suite module to use AI to screen and filter profitable investment opportunities.