Correlation Between BRADESCO and China Merchants

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Can any of the company-specific risk be diversified away by investing in both BRADESCO and China Merchants 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 BRADESCO and China Merchants into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between BRADESCO PN EJ and China Merchants Bank, you can compare the effects of market volatilities on BRADESCO and China Merchants 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 BRADESCO with a short position of China Merchants. Check out your portfolio center. Please also check ongoing floating volatility patterns of BRADESCO and China Merchants.

Diversification Opportunities for BRADESCO and China Merchants

0.3
  Correlation Coefficient

Weak diversification

The 3 months correlation between BRADESCO and China is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding BRADESCO PN EJ N1 and China Merchants Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Merchants Bank and BRADESCO 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 BRADESCO PN EJ are associated (or correlated) with China Merchants. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Merchants Bank has no effect on the direction of BRADESCO i.e., BRADESCO and China Merchants go up and down completely randomly.

Pair Corralation between BRADESCO and China Merchants

Assuming the 90 days trading horizon BRADESCO is expected to generate 9.02 times less return on investment than China Merchants. But when comparing it to its historical volatility, BRADESCO PN EJ is 3.73 times less risky than China Merchants. It trades about 0.02 of its potential returns per unit of risk. China Merchants Bank is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  427.00  in China Merchants Bank on March 31, 2022 and sell it today you would earn a total of  238.00  from holding China Merchants Bank or generate 55.74% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Weak
Accuracy98.39%
ValuesDaily Returns

BRADESCO PN EJ N1  vs.  China Merchants Bank

 Performance (%) 
      Timeline 
BRADESCO PN EJ 
BRADESCO Performance
0 of 100
Over the last 90 days BRADESCO PN EJ has generated negative risk-adjusted returns adding no value to investors with long positions. Even with latest weak performance, the Stock's basic indicators remain invariable and the latest agitation on Wall Street may also be a sign of long-running gains for the enterprise retail investors.

BRADESCO Price Channel

China Merchants Bank 
China Performance
0 of 100
Over the last 90 days China Merchants Bank has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's technical indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Structure and Payout Changes

Forward Annual Dividend Yield
0.0414
Payout Ratio
0.11
Last Split Factor
1098:1073
Forward Annual Dividend Rate
0.24
Dividend Date
2017-07-14
Ex Dividend Date
2022-07-07
Last Split Date
2013-08-29

China Price Channel

BRADESCO and China Merchants Volatility Contrast

 Predicted Return Density 
      Returns 

Pair Trading with BRADESCO and China Merchants

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

BRADESCO PN EJ

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The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against BRADESCO as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. BRADESCO's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, BRADESCO's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to BRADESCO PN EJ.
The idea behind BRADESCO PN EJ and China Merchants 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.

China Merchants Bank

Pair trading matchups for China Merchants

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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.

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