Correlation Between China Merchants and GEM

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

Diversification Opportunities for China Merchants and GEM

0.76

Correlation Coefficient

China Merchants  GEM

Poor diversification

The 3 months correlation between China and GEM is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding China Merchants Bank and GEM Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on GEM Co 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 GEM. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of GEM Co has no effect on the direction of China Merchants i.e., China Merchants and GEM go up and down completely randomly.

Pair Corralation between China Merchants and GEM

Assuming the 90 days trading horizon China Merchants Bank is expected to generate 1.48 times more return on investment than GEM. However, China Merchants is 1.48 times more volatile than GEM Co. It trades about 0.26 of its potential returns per unit of risk. GEM Co is currently generating about -0.23 per unit of risk. If you would invest  3,639  in China Merchants Bank on September 27, 2024 and sell it today you would earn a total of  301.00  from holding China Merchants Bank or generate 8.27% return on investment over 90 days.

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

China Merchants Bank  vs.  GEM Co

China Merchants Bank

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Bank are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, China Merchants may actually be approaching a critical reversion point that can send shares even higher in January 2025.

GEM Co

Risk-Adjusted Performance

1 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in GEM Co are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, GEM 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 GEM

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

The idea behind China Merchants Bank and GEM 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.

Check out your portfolio center.

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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.