Correlation Between China Merchants and China Construction

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

Diversification Opportunities for China Merchants and China Construction

0.76

Correlation Coefficient

China Merchants  China Construction

Poor diversification

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

Pair Corralation between China Merchants and China Construction

Assuming the 90 days trading horizon China Merchants is expected to generate 1.68 times less return on investment than China Construction. In addition to that, China Merchants is 1.16 times more volatile than China Construction Bank. It trades about 0.04 of its total potential returns per unit of risk. China Construction Bank is currently generating about 0.07 per unit of volatility. If you would invest  706.00  in China Construction Bank on August 30, 2024 and sell it today you would earn a total of  98.00  from holding China Construction Bank or generate 13.88% 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.  China Construction Bank

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.

China Construction Bank

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in China Construction Bank are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, China Construction may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with China Merchants and China Construction

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

The idea behind China Merchants Bank and China Construction Bank 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.