Correlation Between Canadian Western and China Merchants

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

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

Diversification Opportunities for Canadian Western and China Merchants

-0.12

Correlation Coefficient

Canadian Western  China Merchants

Good diversification

The 3 months correlation between Canadian and China is -0.12. Overlapping area represents the amount of risk that can be diversified away by holding Canadian Western Bank 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 Canadian Western 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 Canadian Western Bank 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 Canadian Western i.e., Canadian Western and China Merchants go up and down completely randomly.

Pair Corralation between Canadian Western and China Merchants

Assuming the 90 days horizon Canadian Western Bank is expected to under-perform the China Merchants. But the pink sheet apears to be less risky and, when comparing its historical volatility, Canadian Western Bank is 1.09 times less risky than China Merchants. The pink sheet trades about -0.08 of its potential returns per unit of risk. The China Merchants Bank is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  2,291  in China Merchants Bank on September 22, 2024 and sell it today you would earn a total of  150.00  from holding China Merchants Bank or generate 6.55% return on investment over 90 days.

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

Canadian Western Bank  vs.  China Merchants Bank

Canadian Western Bank

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Canadian Western Bank are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable fundamental drivers, Canadian Western is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

China Merchants Bank

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Bank are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile forward-looking signals, China Merchants showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Canadian Western and China Merchants

The main advantage of trading using opposite Canadian Western and China Merchants positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Canadian Western 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 Canadian Western Bank 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .