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 and Commonwealth Bank, 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
0.2 | Correlation Coefficient |
Modest diversification
The 3 months correlation between Westpac and Commonwealth is 0.2. Overlapping area represents the amount of risk that can be diversified away by holding Westpac Banking and Commonwealth Bank 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 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 is expected to under-perform the Commonwealth Bank. But the stock apears to be less risky and, when comparing its historical volatility, Westpac Banking is 5.17 times less risky than Commonwealth Bank. The stock trades about -0.3 of its potential returns per unit of risk. The Commonwealth Bank is currently generating about 0.28 of returns per unit of risk over similar time horizon. If you would invest 14,286 in Commonwealth Bank on August 29, 2024 and sell it today you would earn a total of 1,160 from holding Commonwealth Bank or generate 8.12% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Westpac Banking vs. Commonwealth Bank
Performance |
| Timeline |
| Westpac Banking |
| Commonwealth Bank |
Westpac Banking and Commonwealth Bank Volatility Contrast
Predicted Return Density |
| Returns |
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.| Westpac Banking vs. Origin Energy | Westpac Banking vs. Insurance Australia Group | Westpac Banking vs. Hotel Property Investments | Westpac Banking vs. Ecofibre |
| Commonwealth Bank vs. National Australia Bank | Commonwealth Bank vs. National Australia Bank | Commonwealth Bank vs. Westpac Banking | Commonwealth Bank vs. National Australia Bank |
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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.
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