Correlation Between Bank of China and Qumei Furniture

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

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

Diversification Opportunities for Bank of China and Qumei Furniture

0.23

Correlation Coefficient

Bank of China  Qumei Furniture

Modest diversification

The 3 months correlation between Bank and Qumei is 0.23. Overlapping area represents the amount of risk that can be diversified away by holding Bank of China and Qumei Furniture Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Qumei Furniture Group and Bank of China 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 Bank of China are associated (or correlated) with Qumei Furniture. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Qumei Furniture Group has no effect on the direction of Bank of China i.e., Bank of China and Qumei Furniture go up and down completely randomly.

Pair Corralation between Bank of China and Qumei Furniture

Assuming the 90 days trading horizon Bank of China is expected to generate 5.67 times less return on investment than Qumei Furniture. But when comparing it to its historical volatility, Bank of China is 2.57 times less risky than Qumei Furniture. It trades about 0.09 of its potential returns per unit of risk. Qumei Furniture Group is currently generating about 0.19 of returns per unit of risk over similar time horizon. If you would invest  226.00  in Qumei Furniture Group on September 4, 2024 and sell it today you would earn a total of  110.00  from holding Qumei Furniture Group or generate 48.67% return on investment over 90 days.

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

Bank of China  vs.  Qumei Furniture Group

Bank of China

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Bank of China are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Bank of China may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Qumei Furniture Group

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Qumei Furniture Group are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Qumei Furniture sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Bank of China and Qumei Furniture

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

The idea behind Bank of China and Qumei Furniture 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.

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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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.