Correlation Between Commonwealth Bank and Butn

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

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

Diversification Opportunities for Commonwealth Bank and Butn

0.68

Correlation Coefficient

Commonwealth Bank  Butn

Poor diversification

The 3 months correlation between Commonwealth and Butn is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding Commonwealth Bank and Butn in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Butn 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 are associated (or correlated) with Butn. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Butn has no effect on the direction of Commonwealth Bank i.e., Commonwealth Bank and Butn go up and down completely randomly.

Pair Corralation between Commonwealth Bank and Butn

Assuming the 90 days trading horizon Commonwealth Bank is expected to generate 2.06 times less return on investment than Butn. But when comparing it to its historical volatility, Commonwealth Bank is 2.73 times less risky than Butn. It trades about 0.14 of its potential returns per unit of risk. Butn is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  4.60  in Butn on September 29, 2024 and sell it today you would earn a total of  2.40  from holding Butn or generate 52.17% return on investment over 90 days.

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

Commonwealth Bank  vs.  Butn

Commonwealth Bank

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Commonwealth Bank are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Commonwealth Bank unveiled solid returns over the last few months and may actually be approaching a breakup point.

Butn

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Butn are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Butn unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Commonwealth Bank and Butn

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

The idea behind Commonwealth Bank and Butn 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 Headlines Timeline module to stay connected to all market stories and filter out noise. Drill down to analyze hype elasticity.