Correlation Between Westinghouse Air and HSBC Holdings

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

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

Diversification Opportunities for Westinghouse Air and HSBC Holdings

0.88

Correlation Coefficient

Westinghouse Air  HSBC Holdings

Very poor diversification

The 3 months correlation between Westinghouse and HSBC is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Westinghouse Air Brake 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 Westinghouse Air 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 Westinghouse Air Brake 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 Westinghouse Air i.e., Westinghouse Air and HSBC Holdings go up and down completely randomly.

Pair Corralation between Westinghouse Air and HSBC Holdings

Assuming the 90 days trading horizon Westinghouse Air Brake is expected to under-perform the HSBC Holdings. But the stock apears to be less risky and, when comparing its historical volatility, Westinghouse Air Brake is 1.09 times less risky than HSBC Holdings. The stock trades about -0.33 of its potential returns per unit of risk. The HSBC Holdings plc is currently generating about 0.17 of returns per unit of risk over similar time horizon. If you would invest  7,215  in HSBC Holdings plc on October 8, 2024 and sell it today you would earn a total of  286.00  from holding HSBC Holdings plc or generate 3.96% return on investment over 90 days.

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

Westinghouse Air Brake  vs.  HSBC Holdings plc

Westinghouse Air Brake

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Westinghouse Air Brake are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Westinghouse Air sustained solid returns over the last few months and may actually be approaching a breakup point.

HSBC Holdings plc

Risk-Adjusted Performance

23 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in HSBC Holdings plc are ranked lower than 23 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, HSBC Holdings sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Westinghouse Air and HSBC Holdings

The main advantage of trading using opposite Westinghouse Air and HSBC Holdings positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Westinghouse Air 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 Westinghouse Air Brake 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.

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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.