Correlation Between Community West and China Merchants

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

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

Diversification Opportunities for Community West and China Merchants

-0.72

Correlation Coefficient

Community West  China Merchants

Pay attention - limited upside

The 3 months correlation between Community and China is -0.72. Overlapping area represents the amount of risk that can be diversified away by holding Community West Bancshares 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 Community West 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 Community West Bancshares 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 Community West i.e., Community West and China Merchants go up and down completely randomly.

Pair Corralation between Community West and China Merchants

Given the investment horizon of 90 days Community West Bancshares is expected to under-perform the China Merchants. But the stock apears to be less risky and, when comparing its historical volatility, Community West Bancshares is 3.71 times less risky than China Merchants. The stock trades about -0.19 of its potential returns per unit of risk. The China Merchants Bank is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  488.00  in China Merchants Bank on November 28, 2024 and sell it today you would lose (1.00) from holding China Merchants Bank or give up 0.2% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	62.71%
Values	Daily Returns

Community West Bancshares  vs.  China Merchants Bank

Community West Bancshares

Risk-Adjusted Performance

Very Weak

Over the last 90 days Community West Bancshares has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of conflicting performance in the last few months, the Stock's fundamental drivers remain rather sound which may send shares a bit higher in March 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

China Merchants Bank

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Bank are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile technical indicators, China Merchants may actually be approaching a critical reversion point that can send shares even higher in March 2025.

Pair Trading with Community West and China Merchants

The main advantage of trading using opposite Community West and China Merchants positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Community West 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 Community West Bancshares 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.

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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 Portfolio Anywhere module to track or share privately all of your investments from the convenience of any device.