Correlation Between Visa and China Construction

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

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

Diversification Opportunities for Visa and China Construction

-0.6

Correlation Coefficient

Visa  China Construction

Excellent diversification

The 3 months correlation between Visa and China is -0.6. Overlapping area represents the amount of risk that can be diversified away by holding Visa Class A 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 Visa 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 Visa Class A 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 Visa i.e., Visa and China Construction go up and down completely randomly.

Pair Corralation between Visa and China Construction

Taking into account the 90-day investment horizon Visa Class A is expected to generate 2.24 times more return on investment than China Construction. However, Visa is 2.24 times more volatile than China Construction Bank. It trades about 0.11 of its potential returns per unit of risk. China Construction Bank is currently generating about -0.01 per unit of risk. If you would invest  28,992  in Visa Class A on September 16, 2024 and sell it today you would earn a total of  2,482  from holding Visa Class A or generate 8.56% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	98.46%
Values	Daily Returns

Visa Class A  vs.  China Construction Bank

Visa Class A

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Visa Class A are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of fairly inconsistent basic indicators, Visa may actually be approaching a critical reversion point that can send shares even higher in January 2025.

China Construction Bank

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days China Construction Bank has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, China Construction is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Visa and China Construction

The main advantage of trading using opposite Visa and China Construction positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Visa 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 Visa Class A 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.

Check out your portfolio center.

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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.