Can any of the company-specific risk be diversified away by investing in both Bank of America 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 Bank of America and China Construction into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Bank of America and China Construction Bank, you can compare the effects of market volatilities on Bank of America 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 Bank of America with a short position of China Construction. Check out your portfolio center. Please also check ongoing floating volatility patterns of Bank of America and China Construction.
Diversification Opportunities for Bank of America and China Construction
The 3 months correlation between Bank and China is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Bank of America 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 Bank of America 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 Bank of America 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 Bank of America i.e., Bank of America and China Construction go up and down completely randomly.
Pair Corralation between Bank of America and China Construction
Assuming the 90 days trading horizon Bank of America is expected to generate 3.25 times less return on investment than China Construction. But when comparing it to its historical volatility, Bank of America is 4.19 times less risky than China Construction. It trades about 0.14 of its potential returns per unit of risk. China Construction Bank is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest 61.00 in China Construction Bank on March 5, 2024 and sell it today you would earn a total of 10.00 from holding China Construction Bank or generate 16.39% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in Bank of America are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite fairly strong essential indicators, Bank of America is not utilizing all of its potentials. The current stock price confusion, may contribute to short-horizon losses for the traders.
Compared to the overall equity markets, risk-adjusted returns on investments in China Construction Bank are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak technical indicators, China Construction reported solid returns over the last few months and may actually be approaching a breakup point.