Correlation Between First Insurance and China Development

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

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

Diversification Opportunities for First Insurance and China Development

0.8

Correlation Coefficient

First Insurance  China Development

Very poor diversification

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

Pair Corralation between First Insurance and China Development

Assuming the 90 days trading horizon First Insurance is expected to generate 1.09 times less return on investment than China Development. But when comparing it to its historical volatility, First Insurance Co is 1.48 times less risky than China Development. It trades about 0.25 of its potential returns per unit of risk. China Development Financial is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  1,600  in China Development Financial on September 14, 2024 and sell it today you would earn a total of  225.00  from holding China Development Financial or generate 14.06% return on investment over 90 days.

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

First Insurance Co  vs.  China Development Financial

First Insurance

Risk-Adjusted Performance

19 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in First Insurance Co are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, First Insurance showed solid returns over the last few months and may actually be approaching a breakup point.

China Development

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in China Development Financial are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, China Development showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with First Insurance and China Development

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

The idea behind First Insurance Co and China Development Financial 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.