Correlation Between China Life and Prudential Financial

Can any of the company-specific risk be diversified away by investing in both China Life and Prudential Financial 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 Prudential Financial 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 Prudential Financial, you can compare the effects of market volatilities on China Life and Prudential Financial 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 Prudential Financial. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Life and Prudential Financial.

Diversification Opportunities for China Life and Prudential Financial

0.28

Correlation Coefficient

China Life  Prudential Financial

Modest diversification

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

Pair Corralation between China Life and Prudential Financial

Assuming the 90 days horizon China Life Insurance is expected to under-perform the Prudential Financial. In addition to that, China Life is 2.44 times more volatile than Prudential Financial. It trades about -0.13 of its total potential returns per unit of risk. Prudential Financial is currently generating about -0.27 per unit of volatility. If you would invest  12,684  in Prudential Financial on September 18, 2024 and sell it today you would lose (796.00) from holding Prudential Financial or give up 6.28% of portfolio value over 90 days.

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

China Life Insurance  vs.  Prudential Financial

China Life Insurance

Risk-Adjusted Performance

8 of 100

OK

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

Prudential Financial

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Prudential Financial are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable basic indicators, Prudential Financial is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with China Life and Prudential Financial

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

The idea behind China Life Insurance and Prudential Financial 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.