Correlation Between Shanghai Material and China Merchants

Can any of the company-specific risk be diversified away by investing in both Shanghai Material and China Merchants 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 Shanghai Material and China Merchants into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Shanghai Material Trading and China Merchants Shekou, you can compare the effects of market volatilities on Shanghai Material and China Merchants 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 Shanghai Material with a short position of China Merchants. Check out your portfolio center. Please also check ongoing floating volatility patterns of Shanghai Material and China Merchants.

Diversification Opportunities for Shanghai Material and China Merchants

0.02

Correlation Coefficient

Shanghai Material  China Merchants

Significant diversification

The 3 months correlation between Shanghai and China is 0.02. Overlapping area represents the amount of risk that can be diversified away by holding Shanghai Material Trading and China Merchants Shekou in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Merchants Shekou and Shanghai Material 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 Shanghai Material Trading are associated (or correlated) with China Merchants. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Merchants Shekou has no effect on the direction of Shanghai Material i.e., Shanghai Material and China Merchants go up and down completely randomly.

Pair Corralation between Shanghai Material and China Merchants

Assuming the 90 days trading horizon Shanghai Material Trading is expected to generate 1.59 times more return on investment than China Merchants. However, Shanghai Material is 1.59 times more volatile than China Merchants Shekou. It trades about 0.04 of its potential returns per unit of risk. China Merchants Shekou is currently generating about -0.09 per unit of risk. If you would invest  950.00  in Shanghai Material Trading on October 4, 2024 and sell it today you would earn a total of  57.00  from holding Shanghai Material Trading or generate 6.0% return on investment over 90 days.

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

Shanghai Material Trading  vs.  China Merchants Shekou

Shanghai Material Trading

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Shanghai Material Trading are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Shanghai Material may actually be approaching a critical reversion point that can send shares even higher in February 2025.

China Merchants Shekou

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days China Merchants Shekou has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's basic indicators remain somewhat strong which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Pair Trading with Shanghai Material and China Merchants

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

The idea behind Shanghai Material Trading and China Merchants Shekou 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.