Correlation Between China Life and AIA

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

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

Diversification Opportunities for China Life and AIA

0.65

Correlation Coefficient

China Life  AIA

Poor diversification

The 3 months correlation between China and AIA is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding China Life Insurance and AIA Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AIA Group and China Life 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 Life Insurance are associated (or correlated) with AIA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of AIA Group has no effect on the direction of China Life i.e., China Life and AIA go up and down completely randomly.

Pair Corralation between China Life and AIA

Assuming the 90 days horizon China Life is expected to generate 3.99 times less return on investment than AIA. But when comparing it to its historical volatility, China Life Insurance is 1.86 times less risky than AIA. It trades about 0.03 of its potential returns per unit of risk. AIA Group is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  693.00  in AIA Group on December 28, 2024 and sell it today you would earn a total of  69.00  from holding AIA Group or generate 9.96% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.33%
Values	Daily Returns

China Life Insurance  vs.  AIA Group

China Life Insurance

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in China Life Insurance are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable forward-looking indicators, China Life is not utilizing all of its potentials. The recent stock price disturbance, may contribute to mid-run losses for the stockholders.

AIA Group

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in AIA Group are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak technical and fundamental indicators, AIA reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Life and AIA

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

The idea behind China Life Insurance and AIA Group 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.