Correlation Between China Merchants and Air China

Can any of the company-specific risk be diversified away by investing in both China Merchants and Air China 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 Air China 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 Air China Ltd, you can compare the effects of market volatilities on China Merchants and Air China 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 Air China. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Merchants and Air China.

Diversification Opportunities for China Merchants and Air China

0.68

Correlation Coefficient

China Merchants  Air China

Poor diversification

The 3 months correlation between China and Air is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding China Merchants Shekou and Air China Ltd in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Air China 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 Air China. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Air China has no effect on the direction of China Merchants i.e., China Merchants and Air China go up and down completely randomly.

Pair Corralation between China Merchants and Air China

Assuming the 90 days trading horizon China Merchants is expected to generate 1.74 times less return on investment than Air China. In addition to that, China Merchants is 1.4 times more volatile than Air China Ltd. It trades about 0.1 of its total potential returns per unit of risk. Air China Ltd is currently generating about 0.25 per unit of volatility. If you would invest  632.00  in Air China Ltd on September 14, 2024 and sell it today you would earn a total of  247.00  from holding Air China Ltd or generate 39.08% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.28%
Values	Daily Returns

China Merchants Shekou  vs.  Air China Ltd

China Merchants Shekou

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Shekou are ranked lower than 8 (%) 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.

Air China

Risk-Adjusted Performance

19 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Air China Ltd are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Air China sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Merchants and Air China

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

The idea behind China Merchants Shekou and Air China Ltd 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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.