Correlation Between ABN AMRO and Westpac Banking

Can any of the company-specific risk be diversified away by investing in both ABN AMRO and Westpac Banking 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 ABN AMRO and Westpac Banking into the same portfolio, which is an essential part of the fundamental portfolio management process.

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

Diversification Opportunities for ABN AMRO and Westpac Banking

0.8

Correlation Coefficient

ABN AMRO  Westpac Banking

Very poor diversification

The 3 months correlation between ABN and Westpac is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding ABN AMRO Bank and Westpac Banking in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Westpac Banking and ABN AMRO 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 ABN AMRO Bank are associated (or correlated) with Westpac Banking. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Westpac Banking has no effect on the direction of ABN AMRO i.e., ABN AMRO and Westpac Banking go up and down completely randomly.

Pair Corralation between ABN AMRO and Westpac Banking

Assuming the 90 days horizon ABN AMRO is expected to generate 2.61 times less return on investment than Westpac Banking. But when comparing it to its historical volatility, ABN AMRO Bank is 1.78 times less risky than Westpac Banking. It trades about 0.07 of its potential returns per unit of risk. Westpac Banking is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  1,770  in Westpac Banking on August 8, 2024 and sell it today you would earn a total of  255.00  from holding Westpac Banking or generate 14.41% return on investment over 90 days.

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

ABN AMRO Bank  vs.  Westpac Banking

ABN AMRO Bank

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in ABN AMRO Bank are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong primary indicators, ABN AMRO is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Westpac Banking

Risk-Adjusted Performance

7 of 100

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 nearly fragile basic indicators, Westpac Banking reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with ABN AMRO and Westpac Banking

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

The idea behind ABN AMRO Bank and Westpac Banking 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.