Correlation Between China Merchants and Shanxi Xishan

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

By analyzing existing cross correlation between China Merchants Bank and Shanxi Xishan Coal, you can compare the effects of market volatilities on China Merchants and Shanxi Xishan 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 Shanxi Xishan. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Merchants and Shanxi Xishan.

Diversification Opportunities for China Merchants and Shanxi Xishan

0.87

Correlation Coefficient

China Merchants  Shanxi Xishan

Very poor diversification

The 3 months correlation between China and Shanxi is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding China Merchants Bank and Shanxi Xishan Coal in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Shanxi Xishan Coal 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 Bank are associated (or correlated) with Shanxi Xishan. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Shanxi Xishan Coal has no effect on the direction of China Merchants i.e., China Merchants and Shanxi Xishan go up and down completely randomly.

Pair Corralation between China Merchants and Shanxi Xishan

Assuming the 90 days trading horizon China Merchants Bank is expected to generate 0.88 times more return on investment than Shanxi Xishan. However, China Merchants Bank is 1.14 times less risky than Shanxi Xishan. It trades about 0.2 of its potential returns per unit of risk. Shanxi Xishan Coal is currently generating about 0.11 per unit of risk. If you would invest  3,023  in China Merchants Bank on September 12, 2024 and sell it today you would earn a total of  837.00  from holding China Merchants Bank or generate 27.69% return on investment over 90 days.

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

China Merchants Bank  vs.  Shanxi Xishan Coal

China Merchants Bank

Risk-Adjusted Performance

15 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Bank are ranked lower than 15 (%) 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.

Shanxi Xishan Coal

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Shanxi Xishan Coal are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Shanxi Xishan sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Merchants and Shanxi Xishan

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

The idea behind China Merchants Bank and Shanxi Xishan Coal 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 File Import module to quickly import all of your third-party portfolios from your local drive in csv format.