Correlation Between China Merchants and Hainan Development

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

Diversification Opportunities for China Merchants and Hainan Development

0.08

Correlation Coefficient

China Merchants  Hainan Development

Significant diversification

The 3 months correlation between China and Hainan is 0.08. Overlapping area represents the amount of risk that can be diversified away by holding China Merchants Bank and Hainan Development Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Hainan Development 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 Hainan Development. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Hainan Development has no effect on the direction of China Merchants i.e., China Merchants and Hainan Development go up and down completely randomly.

Pair Corralation between China Merchants and Hainan Development

Assuming the 90 days trading horizon China Merchants Bank is expected to generate 0.37 times more return on investment than Hainan Development. However, China Merchants Bank is 2.71 times less risky than Hainan Development. It trades about 0.22 of its potential returns per unit of risk. Hainan Development Holdings is currently generating about 0.02 per unit of risk. If you would invest  3,940  in China Merchants Bank on December 25, 2024 and sell it today you would earn a total of  569.00  from holding China Merchants Bank or generate 14.44% return on investment over 90 days.

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

China Merchants Bank  vs.  Hainan Development Holdings

China Merchants Bank

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Bank are ranked lower than 17 (%) 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.

Hainan Development

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Hainan Development Holdings are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Hainan Development is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with China Merchants and Hainan Development

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

The idea behind China Merchants Bank and Hainan Development Holdings 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.