Correlation Between China Railway and Bank of America
Can any of the company-specific risk be diversified away by investing in both China Railway and Bank of America 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 China Railway and Bank of America into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between China Railway Construction and Verizon Communications, you can compare the effects of market volatilities on China Railway and Bank of America 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 China Railway with a short position of Bank of America. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Railway and Bank of America.
Diversification Opportunities for China Railway and Bank of America
0.27 | Correlation Coefficient |
Modest diversification
The 3 months correlation between China and Bank is 0.27. Overlapping area represents the amount of risk that can be diversified away by holding China Railway Construction and Verizon Communications in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Verizon Communications and China Railway 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 China Railway Construction are associated (or correlated) with Bank of America. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Verizon Communications has no effect on the direction of China Railway i.e., China Railway and Bank of America go up and down completely randomly.
Pair Corralation between China Railway and Bank of America
Assuming the 90 days horizon China Railway Construction is expected to under-perform the Bank of America. But the stock apears to be less risky and, when comparing its historical volatility, China Railway Construction is 1.3 times less risky than Bank of America. The stock trades about -0.22 of its potential returns per unit of risk. The Verizon Communications is currently generating about 0.33 of returns per unit of risk over similar time horizon. If you would invest 3,842 in Verizon Communications on August 29, 2024 and sell it today you would earn a total of 381.00 from holding Verizon Communications or generate 9.92% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Weak |
| Accuracy | 91.3% |
| Values | Daily Returns |
China Railway Construction vs. Verizon Communications
Performance |
| Timeline |
| China Railway Constr |
| Verizon Communications |
China Railway and Bank of America Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with China Railway and Bank of America
The main advantage of trading using opposite China Railway and Bank of America positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if China Railway position performs unexpectedly, Bank of America 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 Bank of America will offset losses from the drop in Bank of America's long position.| China Railway vs. Infrastrutture Wireless Italiane | China Railway vs. Transport International Holdings | China Railway vs. NTG Nordic Transport | China Railway vs. DICKS Sporting Goods |
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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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.
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