Correlation Between China Container and China Airlines

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

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

Diversification Opportunities for China Container and China Airlines

0.25

Correlation Coefficient

China Container  China Airlines

Modest diversification

The 3 months correlation between China and China is 0.25. Overlapping area represents the amount of risk that can be diversified away by holding China Container Terminal and China Airlines in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Airlines and China Container 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 Container Terminal are associated (or correlated) with China Airlines. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Airlines has no effect on the direction of China Container i.e., China Container and China Airlines go up and down completely randomly.

Pair Corralation between China Container and China Airlines

Assuming the 90 days trading horizon China Container Terminal is expected to generate 1.87 times more return on investment than China Airlines. However, China Container is 1.87 times more volatile than China Airlines. It trades about 0.07 of its potential returns per unit of risk. China Airlines is currently generating about 0.05 per unit of risk. If you would invest  2,360  in China Container Terminal on September 17, 2024 and sell it today you would earn a total of  1,125  from holding China Container Terminal or generate 47.67% return on investment over 90 days.

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

China Container Terminal  vs.  China Airlines

China Container Terminal

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in China Container Terminal are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, China Container showed solid returns over the last few months and may actually be approaching a breakup point.

China Airlines

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in China Airlines are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, China Airlines showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Container and China Airlines

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

The idea behind China Container Terminal and China 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.

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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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..