Correlation Between China Merchants and Ligao Foods

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

Diversification Opportunities for China Merchants and Ligao Foods

0.89

Correlation Coefficient

China Merchants  Ligao Foods

Very poor diversification

The 3 months correlation between China and Ligao is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding China Merchants Bank and Ligao Foods CoLtd in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ligao Foods CoLtd 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 Ligao Foods. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ligao Foods CoLtd has no effect on the direction of China Merchants i.e., China Merchants and Ligao Foods go up and down completely randomly.

Pair Corralation between China Merchants and Ligao Foods

Assuming the 90 days trading horizon China Merchants is expected to generate 4.06 times less return on investment than Ligao Foods. But when comparing it to its historical volatility, China Merchants Bank is 1.98 times less risky than Ligao Foods. It trades about 0.11 of its potential returns per unit of risk. Ligao Foods CoLtd is currently generating about 0.22 of returns per unit of risk over similar time horizon. If you would invest  2,331  in Ligao Foods CoLtd on September 2, 2024 and sell it today you would earn a total of  1,613  from holding Ligao Foods CoLtd or generate 69.2% 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.  Ligao Foods CoLtd

China Merchants Bank

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Bank are ranked lower than 8 (%) 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.

Ligao Foods CoLtd

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Ligao Foods CoLtd are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Ligao Foods sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Merchants and Ligao Foods

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

The idea behind China Merchants Bank and Ligao Foods CoLtd 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.