Correlation Between China Life and Prudential PLC

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

Diversification Opportunities for China Life and Prudential PLC

0.81

Correlation Coefficient

China Life  Prudential PLC

Very poor diversification

The 3 months correlation between China and Prudential is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding China Life Insurance and Prudential PLC ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Prudential PLC ADR 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 PLC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Prudential PLC ADR has no effect on the direction of China Life i.e., China Life and Prudential PLC go up and down completely randomly.

Pair Corralation between China Life and Prudential PLC

Assuming the 90 days horizon China Life is expected to generate 6.42 times less return on investment than Prudential PLC. In addition to that, China Life is 1.29 times more volatile than Prudential PLC ADR. It trades about 0.03 of its total potential returns per unit of risk. Prudential PLC ADR is currently generating about 0.27 per unit of volatility. If you would invest  1,561  in Prudential PLC ADR on December 30, 2024 and sell it today you would earn a total of  582.00  from holding Prudential PLC ADR or generate 37.28% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.39%
Values	Daily Returns

China Life Insurance  vs.  Prudential PLC ADR

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.

Prudential PLC ADR

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Prudential PLC ADR are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. Despite quite conflicting basic indicators, Prudential PLC disclosed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Life and Prudential PLC

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

The idea behind China Life Insurance and Prudential PLC ADR 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.

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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 Positions Ratings module to determine portfolio positions ratings based on digital equity recommendations. Macroaxis instant position ratings are based on combination of fundamental analysis and risk-adjusted market performance.