Correlation Between HSBC Holdings and Bank of China Ltd ADR

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

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

Diversification Opportunities for HSBC Holdings and Bank of China Ltd ADR

0.49

Correlation Coefficient

HSBC Holdings  Bank of China Ltd ADR

Very weak diversification

The 3 months correlation between HSBC and Bank is 0.49. Overlapping area represents the amount of risk that can be diversified away by holding HSBC Holdings PLC and Bank of China in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Bank of China Ltd ADR and HSBC Holdings 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 HSBC Holdings PLC are associated (or correlated) with Bank of China Ltd ADR. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Bank of China Ltd ADR has no effect on the direction of HSBC Holdings i.e., HSBC Holdings and Bank of China Ltd ADR go up and down completely randomly.

Pair Corralation between HSBC Holdings and Bank of China Ltd ADR

Given the investment horizon of 90 days HSBC Holdings PLC is expected to generate 0.58 times more return on investment than Bank of China Ltd ADR. However, HSBC Holdings PLC is 1.74 times less risky than Bank of China Ltd ADR. It trades about 0.11 of its potential returns per unit of risk. Bank of China is currently generating about 0.06 per unit of risk. If you would invest  4,296  in HSBC Holdings PLC on September 3, 2024 and sell it today you would earn a total of  393.00  from holding HSBC Holdings PLC or generate 9.15% return on investment over 90 days.

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

HSBC Holdings PLC  vs.  Bank of China

HSBC Holdings PLC

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in HSBC Holdings PLC are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile fundamental drivers, HSBC Holdings may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Bank of China Ltd ADR

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Bank of China are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak technical indicators, Bank of China Ltd ADR may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with HSBC Holdings and Bank of China Ltd ADR

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

The idea behind HSBC Holdings PLC and Bank of China 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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.