Correlation Between HDFC Bank and China Merchants

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

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

Diversification Opportunities for HDFC Bank and China Merchants

0.36

Correlation Coefficient

HDFC Bank  China Merchants

Weak diversification

The 3 months correlation between HDFC and China is 0.36. Overlapping area represents the amount of risk that can be diversified away by holding HDFC Bank Limited and China Merchants Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Merchants Bank and HDFC 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 HDFC Bank Limited are associated (or correlated) with China Merchants. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Merchants Bank has no effect on the direction of HDFC Bank i.e., HDFC Bank and China Merchants go up and down completely randomly.

Pair Corralation between HDFC Bank and China Merchants

Considering the 90-day investment horizon HDFC Bank Limited is expected to under-perform the China Merchants. But the stock apears to be less risky and, when comparing its historical volatility, HDFC Bank Limited is 1.37 times less risky than China Merchants. The stock trades about -0.03 of its potential returns per unit of risk. The China Merchants Bank is currently generating about 0.0 of returns per unit of risk over similar time horizon. If you would invest  2,269  in China Merchants Bank on January 26, 2024 and sell it today you would lose (169.00) from holding China Merchants Bank or give up 7.45% of portfolio value over 90 days.

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

HDFC Bank Limited  vs.  China Merchants Bank

HDFC Bank Limited

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in HDFC Bank Limited are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong fundamental indicators, HDFC Bank is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

China Merchants Bank

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Bank are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile forward-looking signals, China Merchants showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with HDFC Bank and China Merchants

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

The idea behind HDFC Bank Limited and China Merchants 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.

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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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.