Correlation Between China Merchants and China Express

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

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

Diversification Opportunities for China Merchants and China Express

0.86

Correlation Coefficient

China Merchants  China Express

Very poor diversification

The 3 months correlation between China and China is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding China Merchants Shekou and China Express Airlines in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Express Airlines and China Merchants 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 China Merchants Shekou are associated (or correlated) with China Express. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Express Airlines has no effect on the direction of China Merchants i.e., China Merchants and China Express go up and down completely randomly.

Pair Corralation between China Merchants and China Express

Assuming the 90 days trading horizon China Merchants Shekou is expected to under-perform the China Express. In addition to that, China Merchants is 1.4 times more volatile than China Express Airlines. It trades about -0.06 of its total potential returns per unit of risk. China Express Airlines is currently generating about -0.03 per unit of volatility. If you would invest  866.00  in China Express Airlines on September 14, 2024 and sell it today you would lose (11.00) from holding China Express Airlines or give up 1.27% of portfolio value over 90 days.

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

China Merchants Shekou  vs.  China Express Airlines

China Merchants Shekou

Risk-Adjusted Performance

9 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Shekou are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, China Merchants sustained solid returns over the last few months and may actually be approaching a breakup point.

China Express Airlines

Risk-Adjusted Performance

22 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in China Express Airlines are ranked lower than 22 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, China Express sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Merchants and China Express

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

The idea behind China Merchants Shekou and China Express Airlines 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.