Correlation Between Aerospace and China Life

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

By analyzing existing cross correlation between Aerospace Hi Tech Holding and China Life Insurance, you can compare the effects of market volatilities on Aerospace and China Life 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 Aerospace with a short position of China Life. Check out your portfolio center. Please also check ongoing floating volatility patterns of Aerospace and China Life.

Diversification Opportunities for Aerospace and China Life

0.8

Correlation Coefficient

Aerospace  China Life

Very poor diversification

The 3 months correlation between Aerospace and China is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Aerospace Hi Tech Holding and China Life Insurance in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Life Insurance and Aerospace 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 Aerospace Hi Tech Holding are associated (or correlated) with China Life. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Life Insurance has no effect on the direction of Aerospace i.e., Aerospace and China Life go up and down completely randomly.

Pair Corralation between Aerospace and China Life

Assuming the 90 days trading horizon Aerospace is expected to generate 1.25 times less return on investment than China Life. In addition to that, Aerospace is 1.5 times more volatile than China Life Insurance. It trades about 0.03 of its total potential returns per unit of risk. China Life Insurance is currently generating about 0.06 per unit of volatility. If you would invest  3,053  in China Life Insurance on September 23, 2024 and sell it today you would earn a total of  1,090  from holding China Life Insurance or generate 35.7% return on investment over 90 days.

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

Aerospace Hi Tech Holding  vs.  China Life Insurance

Aerospace Hi Tech

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Aerospace Hi Tech Holding are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Aerospace sustained solid returns over the last few months and may actually be approaching a breakup point.

China Life Insurance

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in China Life Insurance are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, China Life sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Aerospace and China Life

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

The idea behind Aerospace Hi Tech Holding and China Life Insurance 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.