Correlation Between Westpac Banking and Commonwealth Bank

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

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

Diversification Opportunities for Westpac Banking and Commonwealth Bank

0.35

Correlation Coefficient

Westpac Banking  Commonwealth Bank

Weak diversification

The 3 months correlation between Westpac and Commonwealth is 0.35. Overlapping area represents the amount of risk that can be diversified away by holding Westpac Banking Corp and Commonwealth Bank of in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Commonwealth Bank and Westpac Banking 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 Westpac Banking Corp 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 Westpac Banking i.e., Westpac Banking and Commonwealth Bank go up and down completely randomly.

Pair Corralation between Westpac Banking and Commonwealth Bank

Assuming the 90 days trading horizon Westpac Banking Corp is expected to generate 0.6 times more return on investment than Commonwealth Bank. However, Westpac Banking Corp is 1.67 times less risky than Commonwealth Bank. It trades about 0.09 of its potential returns per unit of risk. Commonwealth Bank of is currently generating about 0.01 per unit of risk. If you would invest  10,094  in Westpac Banking Corp on December 1, 2024 and sell it today you would earn a total of  103.00  from holding Westpac Banking Corp or generate 1.02% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.39%
Values	Daily Returns

Westpac Banking Corp  vs.  Commonwealth Bank of

Westpac Banking Corp

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Westpac Banking Corp are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Westpac Banking is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Commonwealth Bank

Risk-Adjusted Performance

Very Weak

Over the last 90 days Commonwealth Bank of has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Commonwealth Bank is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Westpac Banking and Commonwealth Bank

The main advantage of trading using opposite Westpac Banking and Commonwealth Bank positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Westpac Banking 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 Westpac Banking Corp 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.