Correlation Between China Construction and Sumitomo Mitsui

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

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

Diversification Opportunities for China Construction and Sumitomo Mitsui

0.2

Correlation Coefficient

China Construction  Sumitomo Mitsui

Modest diversification

The 3 months correlation between China and Sumitomo is 0.2. Overlapping area represents the amount of risk that can be diversified away by holding China Construction Bank and Sumitomo Mitsui Financial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sumitomo Mitsui Financial and China Construction 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 China Construction Bank are associated (or correlated) with Sumitomo Mitsui. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sumitomo Mitsui Financial has no effect on the direction of China Construction i.e., China Construction and Sumitomo Mitsui go up and down completely randomly.

Pair Corralation between China Construction and Sumitomo Mitsui

Assuming the 90 days horizon China Construction is expected to generate 13.13 times less return on investment than Sumitomo Mitsui. But when comparing it to its historical volatility, China Construction Bank is 5.64 times less risky than Sumitomo Mitsui. It trades about 0.05 of its potential returns per unit of risk. Sumitomo Mitsui Financial is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  1,005  in Sumitomo Mitsui Financial on September 29, 2024 and sell it today you would earn a total of  1,375  from holding Sumitomo Mitsui Financial or generate 136.82% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	78.96%
Values	Daily Returns

China Construction Bank  vs.  Sumitomo Mitsui Financial

China Construction Bank

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in China Construction Bank are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak technical indicators, China Construction reported solid returns over the last few months and may actually be approaching a breakup point.

Sumitomo Mitsui Financial

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Sumitomo Mitsui Financial are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Sumitomo Mitsui reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Construction and Sumitomo Mitsui

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

The idea behind China Construction Bank and Sumitomo Mitsui Financial 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 Portfolio Center module to all portfolio management and optimization tools to improve performance of your portfolios.