Correlation Between Air Transport and China Eastern

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

By analyzing existing cross correlation between Air Transport Services and China Eastern Airlines, you can compare the effects of market volatilities on Air Transport and China Eastern 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 Air Transport with a short position of China Eastern. Check out your portfolio center. Please also check ongoing floating volatility patterns of Air Transport and China Eastern.

Diversification Opportunities for Air Transport and China Eastern

0.75

Correlation Coefficient

Air Transport  China Eastern

Poor diversification

The 3 months correlation between Air and China is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Air Transport Services and China Eastern Airlines in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Eastern Airlines and Air Transport 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 Air Transport Services are associated (or correlated) with China Eastern. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Eastern Airlines has no effect on the direction of Air Transport i.e., Air Transport and China Eastern go up and down completely randomly.

Pair Corralation between Air Transport and China Eastern

Assuming the 90 days horizon Air Transport is expected to generate 1.34 times less return on investment than China Eastern. But when comparing it to its historical volatility, Air Transport Services is 1.61 times less risky than China Eastern. It trades about 0.1 of its potential returns per unit of risk. China Eastern Airlines is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  22.00  in China Eastern Airlines on October 25, 2024 and sell it today you would earn a total of  10.00  from holding China Eastern Airlines or generate 45.45% return on investment over 90 days.

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

Air Transport Services  vs.  China Eastern Airlines

Air Transport Services

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Air Transport Services are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain basic indicators, Air Transport reported solid returns over the last few months and may actually be approaching a breakup point.

China Eastern Airlines

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in China Eastern Airlines are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady basic indicators, China Eastern reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Air Transport and China Eastern

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

The idea behind Air Transport Services and China Eastern 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.