Correlation Between Commonwealth Bank and China Construction

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

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

Diversification Opportunities for Commonwealth Bank and China Construction

0.53

Correlation Coefficient

Commonwealth Bank  China Construction

Very weak diversification

The 3 months correlation between Commonwealth and China is 0.53. Overlapping area represents the amount of risk that can be diversified away by holding Commonwealth Bank of and China Construction Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Construction Bank and Commonwealth 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 Commonwealth Bank of are associated (or correlated) with China Construction. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Construction Bank has no effect on the direction of Commonwealth Bank i.e., Commonwealth Bank and China Construction go up and down completely randomly.

Pair Corralation between Commonwealth Bank and China Construction

Assuming the 90 days horizon Commonwealth Bank of is expected to under-perform the China Construction. But the stock apears to be less risky and, when comparing its historical volatility, Commonwealth Bank of is 1.19 times less risky than China Construction. The stock trades about -0.12 of its potential returns per unit of risk. The China Construction Bank is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest  74.00  in China Construction Bank on September 22, 2024 and sell it today you would earn a total of  4.00  from holding China Construction Bank or generate 5.41% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	95.65%
Values	Daily Returns

Commonwealth Bank of  vs.  China Construction Bank

Commonwealth Bank

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Commonwealth Bank of are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain basic indicators, Commonwealth Bank may actually be approaching a critical reversion point that can send shares even higher in January 2025.

China Construction Bank

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in China Construction Bank are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, China Construction reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Commonwealth Bank and China Construction

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

The idea behind Commonwealth Bank of and China Construction 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.

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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.