Correlation Between China Merchants and WuXi AppTec

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

Diversification Opportunities for China Merchants and WuXi AppTec

0.64

Correlation Coefficient

China Merchants  WuXi AppTec

Poor diversification

The 3 months correlation between China and WuXi is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding China Merchants Shekou and WuXi AppTec Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on WuXi AppTec 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 WuXi AppTec. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of WuXi AppTec has no effect on the direction of China Merchants i.e., China Merchants and WuXi AppTec go up and down completely randomly.

Pair Corralation between China Merchants and WuXi AppTec

Assuming the 90 days trading horizon China Merchants Shekou is expected to under-perform the WuXi AppTec. But the stock apears to be less risky and, when comparing its historical volatility, China Merchants Shekou is 1.18 times less risky than WuXi AppTec. The stock trades about -0.04 of its potential returns per unit of risk. The WuXi AppTec Co is currently generating about 0.28 of returns per unit of risk over similar time horizon. If you would invest  4,910  in WuXi AppTec Co on September 26, 2024 and sell it today you would earn a total of  735.00  from holding WuXi AppTec Co or generate 14.97% return on investment over 90 days.

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

China Merchants Shekou  vs.  WuXi AppTec Co

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.

WuXi AppTec

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in WuXi AppTec Co are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, WuXi AppTec sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Merchants and WuXi AppTec

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

The idea behind China Merchants Shekou and WuXi AppTec Co 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.

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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.