Correlation Between China Life and China Express

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

Diversification Opportunities for China Life and China Express

0.8

Correlation Coefficient

China Life  China Express

Very poor diversification

The 3 months correlation between China and China is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding China Life Insurance and China Express Airlines in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Express Airlines 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 Express. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Express Airlines has no effect on the direction of China Life i.e., China Life and China Express go up and down completely randomly.

Pair Corralation between China Life and China Express

Assuming the 90 days trading horizon China Life Insurance is expected to under-perform the China Express. But the stock apears to be less risky and, when comparing its historical volatility, China Life Insurance is 1.38 times less risky than China Express. The stock trades about -0.1 of its potential returns per unit of risk. The China Express Airlines is currently generating about -0.05 of returns per unit of risk over similar time horizon. If you would invest  809.00  in China Express Airlines on December 3, 2024 and sell it today you would lose (66.00) from holding China Express Airlines or give up 8.16% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.31%
Values	Daily Returns

China Life Insurance  vs.  China Express Airlines

China Life Insurance

Risk-Adjusted Performance

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 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.

China Express Airlines

Risk-Adjusted Performance

Very Weak

Over the last 90 days China Express Airlines 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 Life and China Express

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

The idea behind China Life Insurance and China Express Airlines 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 Portfolio Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.