Correlation Between Shanghai Junshi and China Merchants

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

Diversification Opportunities for Shanghai Junshi and China Merchants

0.8

Correlation Coefficient

Shanghai Junshi  China Merchants

Very poor diversification

The 3 months correlation between Shanghai and China is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Shanghai Junshi Biosciences and China Merchants Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Merchants Bank and Shanghai Junshi 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 Junshi Biosciences 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 Bank has no effect on the direction of Shanghai Junshi i.e., Shanghai Junshi and China Merchants go up and down completely randomly.

Pair Corralation between Shanghai Junshi and China Merchants

Assuming the 90 days trading horizon Shanghai Junshi Biosciences is expected to generate 1.74 times more return on investment than China Merchants. However, Shanghai Junshi is 1.74 times more volatile than China Merchants Bank. It trades about 0.12 of its potential returns per unit of risk. China Merchants Bank is currently generating about 0.17 per unit of risk. If you would invest  2,365  in Shanghai Junshi Biosciences on September 20, 2024 and sell it today you would earn a total of  632.00  from holding Shanghai Junshi Biosciences or generate 26.72% return on investment over 90 days.

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

Shanghai Junshi Biosciences  vs.  China Merchants Bank

Shanghai Junshi Bios

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Shanghai Junshi Biosciences are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Shanghai Junshi sustained solid returns over the last few months and may actually be approaching a breakup point.

China Merchants Bank

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Bank are ranked lower than 13 (%) 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 Shanghai Junshi and China Merchants

The main advantage of trading using opposite Shanghai Junshi and China Merchants positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Shanghai Junshi 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 Junshi Biosciences and China Merchants Bank 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 Center module to all portfolio management and optimization tools to improve performance of your portfolios.