Correlation Between China Merchants and China Citic

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

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

Diversification Opportunities for China Merchants and China Citic

0.67

Correlation Coefficient

China Merchants  China Citic

Poor diversification

The 3 months correlation between China and China is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding China Merchants Bank and China Citic Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Citic Bank and China Merchants 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 Merchants Bank are associated (or correlated) with China Citic. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Citic Bank has no effect on the direction of China Merchants i.e., China Merchants and China Citic go up and down completely randomly.

Pair Corralation between China Merchants and China Citic

Assuming the 90 days horizon China Merchants is expected to generate 1.18 times less return on investment than China Citic. But when comparing it to its historical volatility, China Merchants Bank is 1.47 times less risky than China Citic. It trades about 0.11 of its potential returns per unit of risk. China Citic Bank is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  1,223  in China Citic Bank on December 29, 2024 and sell it today you would earn a total of  209.00  from holding China Citic Bank or generate 17.09% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	95.31%
Values	Daily Returns

China Merchants Bank  vs.  China Citic Bank

China Merchants Bank

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Bank are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak forward-looking signals, China Merchants showed solid returns over the last few months and may actually be approaching a breakup point.

China Citic Bank

Risk-Adjusted Performance

OK

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

Pair Trading with China Merchants and China Citic

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

The idea behind China Merchants Bank and China Citic 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 .