Correlation Between China Life and Digital China

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

By analyzing existing cross correlation between China Life Insurance and Digital China Information, you can compare the effects of market volatilities on China Life and Digital China 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 Life with a short position of Digital China. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Life and Digital China.

Diversification Opportunities for China Life and Digital China

0.37

Correlation Coefficient

China Life  Digital China

Weak diversification

The 3 months correlation between China and Digital is 0.37. Overlapping area represents the amount of risk that can be diversified away by holding China Life Insurance and Digital China Information in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Digital China Information and China Life 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 Life Insurance are associated (or correlated) with Digital China. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Digital China Information has no effect on the direction of China Life i.e., China Life and Digital China go up and down completely randomly.

Pair Corralation between China Life and Digital China

Assuming the 90 days trading horizon China Life Insurance is expected to generate 0.67 times more return on investment than Digital China. However, China Life Insurance is 1.48 times less risky than Digital China. It trades about -0.1 of its potential returns per unit of risk. Digital China Information is currently generating about -0.11 per unit of risk. If you would invest  4,464  in China Life Insurance on October 7, 2024 and sell it today you would lose (532.00) from holding China Life Insurance or give up 11.92% of portfolio value over 90 days.

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

China Life Insurance  vs.  Digital China Information

China Life Insurance

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days China Life Insurance 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.

Digital China Information

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Digital China Information 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 China Life and Digital China

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

The idea behind China Life Insurance and Digital China Information 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.