Correlation Between China Construction and Tencent Holdings

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

By analyzing existing cross correlation between China Construction Bank and Tencent Holdings, you can compare the effects of market volatilities on China Construction and Tencent Holdings 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 Construction with a short position of Tencent Holdings. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Construction and Tencent Holdings.

Diversification Opportunities for China Construction and Tencent Holdings

0.28

Correlation Coefficient

China Construction  Tencent Holdings

Modest diversification

The 3 months correlation between China and Tencent is 0.28. Overlapping area represents the amount of risk that can be diversified away by holding China Construction Bank and Tencent Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tencent Holdings and China Construction 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 Construction Bank are associated (or correlated) with Tencent Holdings. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tencent Holdings has no effect on the direction of China Construction i.e., China Construction and Tencent Holdings go up and down completely randomly.

Pair Corralation between China Construction and Tencent Holdings

Assuming the 90 days horizon China Construction Bank is expected to generate 1.05 times more return on investment than Tencent Holdings. However, China Construction is 1.05 times more volatile than Tencent Holdings. It trades about 0.08 of its potential returns per unit of risk. Tencent Holdings is currently generating about 0.07 per unit of risk. If you would invest  52.00  in China Construction Bank on September 23, 2024 and sell it today you would earn a total of  26.00  from holding China Construction Bank or generate 50.0% return on investment over 90 days.

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

China Construction Bank  vs.  Tencent Holdings

China Construction Bank

Risk-Adjusted Performance

8 of 100

OK

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

Tencent Holdings

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Tencent Holdings are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Tencent Holdings reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Construction and Tencent Holdings

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

The idea behind China Construction Bank and Tencent Holdings 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.