Correlation Between Royal Bank and Commonwealth Bank

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

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

Diversification Opportunities for Royal Bank and Commonwealth Bank

0.89

Correlation Coefficient

Royal Bank  Commonwealth Bank

Very poor diversification

The 3 months correlation between Royal and Commonwealth is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Royal Bank of and Commonwealth Bank of in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Commonwealth Bank and Royal Bank 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 Royal Bank of are associated (or correlated) with Commonwealth Bank. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Commonwealth Bank has no effect on the direction of Royal Bank i.e., Royal Bank and Commonwealth Bank go up and down completely randomly.

Pair Corralation between Royal Bank and Commonwealth Bank

Assuming the 90 days horizon Royal Bank is expected to generate 1.24 times less return on investment than Commonwealth Bank. But when comparing it to its historical volatility, Royal Bank of is 1.07 times less risky than Commonwealth Bank. It trades about 0.11 of its potential returns per unit of risk. Commonwealth Bank of is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  6,749  in Commonwealth Bank of on September 24, 2024 and sell it today you would earn a total of  2,425  from holding Commonwealth Bank of or generate 35.93% return on investment over 90 days.

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

Royal Bank of  vs.  Commonwealth Bank of

Royal Bank

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Royal Bank of are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Royal Bank is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Commonwealth Bank

Risk-Adjusted Performance

7 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Commonwealth Bank of are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Commonwealth Bank may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Royal Bank and Commonwealth Bank

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

The idea behind Royal Bank of and Commonwealth Bank of 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 Companies Directory module to evaluate performance of over 100,000 Stocks, Funds, and ETFs against different fundamentals.