Correlation Between Financial Street and China Merchants

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

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

Diversification Opportunities for Financial Street and China Merchants

0.77

Correlation Coefficient

Financial Street  China Merchants

Poor diversification

The 3 months correlation between Financial and China is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Financial Street Holdings and China Merchants Shekou in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Merchants Shekou and Financial Street 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 Financial Street Holdings 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 Shekou has no effect on the direction of Financial Street i.e., Financial Street and China Merchants go up and down completely randomly.

Pair Corralation between Financial Street and China Merchants

Assuming the 90 days trading horizon Financial Street Holdings is expected to generate 1.79 times more return on investment than China Merchants. However, Financial Street is 1.79 times more volatile than China Merchants Shekou. It trades about 0.02 of its potential returns per unit of risk. China Merchants Shekou is currently generating about -0.04 per unit of risk. If you would invest  323.00  in Financial Street Holdings on October 24, 2024 and sell it today you would earn a total of  1.00  from holding Financial Street Holdings or generate 0.31% return on investment over 90 days.

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

Financial Street Holdings  vs.  China Merchants Shekou

Financial Street Holdings

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Financial Street Holdings are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Financial Street is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

China Merchants Shekou

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days China Merchants Shekou has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, China Merchants is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Financial Street and China Merchants

The main advantage of trading using opposite Financial Street and China Merchants positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Financial Street 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.

The idea behind Financial Street Holdings and China Merchants Shekou 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.