Correlation Between China Merchants and Shandong Pharmaceutical

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

Diversification Opportunities for China Merchants and Shandong Pharmaceutical

0.2

Correlation Coefficient

China Merchants  Shandong Pharmaceutical

Modest diversification

The 3 months correlation between China and Shandong is 0.2. Overlapping area represents the amount of risk that can be diversified away by holding China Merchants Bank and Shandong Pharmaceutical Glass in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Shandong Pharmaceutical 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 Shandong Pharmaceutical. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Shandong Pharmaceutical has no effect on the direction of China Merchants i.e., China Merchants and Shandong Pharmaceutical go up and down completely randomly.

Pair Corralation between China Merchants and Shandong Pharmaceutical

Assuming the 90 days trading horizon China Merchants Bank is expected to generate 0.61 times more return on investment than Shandong Pharmaceutical. However, China Merchants Bank is 1.63 times less risky than Shandong Pharmaceutical. It trades about 0.2 of its potential returns per unit of risk. Shandong Pharmaceutical Glass is currently generating about -0.19 per unit of risk. If you would invest  3,835  in China Merchants Bank on October 23, 2024 and sell it today you would earn a total of  179.00  from holding China Merchants Bank or generate 4.67% return on investment over 90 days.

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

China Merchants Bank  vs.  Shandong Pharmaceutical Glass

China Merchants Bank

Risk-Adjusted Performance

1 of 100

Weak

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

Shandong Pharmaceutical

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Shandong Pharmaceutical Glass has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with China Merchants and Shandong Pharmaceutical

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

The idea behind China Merchants Bank and Shandong Pharmaceutical Glass 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.