Correlation Between China Life and China Merchants

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

Diversification Opportunities for China Life and China Merchants

0.9

Correlation Coefficient

China Life  China Merchants

Almost no diversification

The 3 months correlation between China and China is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding China Life Insurance 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 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 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 China Life i.e., China Life and China Merchants go up and down completely randomly.

Pair Corralation between China Life and China Merchants

Assuming the 90 days trading horizon China Life Insurance is expected to generate 1.0 times more return on investment than China Merchants. However, China Life is 1.0 times more volatile than China Merchants Shekou. It trades about 0.11 of its potential returns per unit of risk. China Merchants Shekou is currently generating about 0.1 per unit of risk. If you would invest  3,512  in China Life Insurance on September 17, 2024 and sell it today you would earn a total of  703.00  from holding China Life Insurance or generate 20.02% return on investment over 90 days.

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

China Life Insurance  vs.  China Merchants Shekou

China Life Insurance

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in China Life Insurance are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, China Life sustained solid returns over the last few months and may actually be approaching a breakup point.

China Merchants Shekou

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Shekou 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.

Pair Trading with China Life and China Merchants

The main advantage of trading using opposite China Life and China Merchants positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if China Life 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 China Life Insurance 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.