Correlation Between National Australia and Commonwealth Bank

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

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

Diversification Opportunities for National Australia and Commonwealth Bank

0.66

Correlation Coefficient

National Australia  Commonwealth Bank

Poor diversification

The 3 months correlation between National and Commonwealth is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding National Australia Bank and Commonwealth Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Commonwealth Bank and National Australia 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 National Australia Bank are associated (or correlated) with Commonwealth Bank. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Commonwealth Bank has no effect on the direction of National Australia i.e., National Australia and Commonwealth Bank go up and down completely randomly.

Pair Corralation between National Australia and Commonwealth Bank

Assuming the 90 days trading horizon National Australia is expected to generate 14.37 times less return on investment than Commonwealth Bank. But when comparing it to its historical volatility, National Australia Bank is 5.02 times less risky than Commonwealth Bank. It trades about 0.05 of its potential returns per unit of risk. Commonwealth Bank is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  14,299  in Commonwealth Bank on September 15, 2024 and sell it today you would earn a total of  1,522  from holding Commonwealth Bank or generate 10.64% return on investment over 90 days.

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

National Australia Bank  vs.  Commonwealth Bank

National Australia Bank

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in National Australia Bank are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, National Australia is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Commonwealth Bank

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Commonwealth Bank are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Commonwealth Bank may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with National Australia and Commonwealth Bank

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

The idea behind National Australia Bank and Commonwealth 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.