Correlation Between Westpac Banking and Rea

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Can any of the company-specific risk be diversified away by investing in both Westpac Banking and Rea 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 Rea into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Westpac Banking and Rea Group, you can compare the effects of market volatilities on Westpac Banking and Rea 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 Rea. Check out your portfolio center. Please also check ongoing floating volatility patterns of Westpac Banking and Rea.

Diversification Opportunities for Westpac Banking and Rea

0.44
  Correlation Coefficient

Very weak diversification

The 3 months correlation between Westpac and Rea is 0.44. Overlapping area represents the amount of risk that can be diversified away by holding Westpac Banking and Rea Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Rea Group 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 Rea. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Rea Group has no effect on the direction of Westpac Banking i.e., Westpac Banking and Rea go up and down completely randomly.

Pair Corralation between Westpac Banking and Rea

Assuming the 90 days trading horizon Westpac Banking is expected to generate 4.54 times less return on investment than Rea. But when comparing it to its historical volatility, Westpac Banking is 4.88 times less risky than Rea. It trades about 0.11 of its potential returns per unit of risk. Rea Group is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  16,264  in Rea Group on September 4, 2024 and sell it today you would earn a total of  8,740  from holding Rea Group or generate 53.74% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthWeak
Accuracy81.57%
ValuesDaily Returns

Westpac Banking  vs.  Rea Group

 Performance 
       Timeline  
Westpac Banking 

Risk-Adjusted Performance

7 of 100

 
Weak
 
Strong
OK
Compared to the overall equity markets, risk-adjusted returns on investments in Westpac Banking are ranked lower than 7 (%) 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 current stock price disturbance, may contribute to short-term losses for the investors.
Rea Group 

Risk-Adjusted Performance

20 of 100

 
Weak
 
Strong
Solid
Compared to the overall equity markets, risk-adjusted returns on investments in Rea Group are ranked lower than 20 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Rea unveiled solid returns over the last few months and may actually be approaching a breakup point.

Westpac Banking and Rea Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Westpac Banking and Rea

The main advantage of trading using opposite Westpac Banking and Rea positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Westpac Banking position performs unexpectedly, Rea 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 Rea will offset losses from the drop in Rea's long position.
The idea behind Westpac Banking and Rea Group 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.
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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.

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