Correlation Between China Life and Shanghai Shuixing

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

Diversification Opportunities for China Life and Shanghai Shuixing

-0.2

Correlation Coefficient

China Life  Shanghai Shuixing

Good diversification

The 3 months correlation between China and Shanghai is -0.2. Overlapping area represents the amount of risk that can be diversified away by holding China Life Insurance and Shanghai Shuixing Home in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Shanghai Shuixing Home 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 Shanghai Shuixing. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Shanghai Shuixing Home has no effect on the direction of China Life i.e., China Life and Shanghai Shuixing go up and down completely randomly.

Pair Corralation between China Life and Shanghai Shuixing

Assuming the 90 days trading horizon China Life Insurance is expected to under-perform the Shanghai Shuixing. But the stock apears to be less risky and, when comparing its historical volatility, China Life Insurance is 1.24 times less risky than Shanghai Shuixing. The stock trades about -0.1 of its potential returns per unit of risk. The Shanghai Shuixing Home is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  1,450  in Shanghai Shuixing Home on October 4, 2024 and sell it today you would earn a total of  223.00  from holding Shanghai Shuixing Home or generate 15.38% return on investment over 90 days.

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

China Life Insurance  vs.  Shanghai Shuixing Home

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.

Shanghai Shuixing Home

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Shanghai Shuixing Home are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Shanghai Shuixing sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Life and Shanghai Shuixing

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

The idea behind China Life Insurance and Shanghai Shuixing Home 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.