Correlation Between Morgan Stanley and Air China

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

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

Diversification Opportunities for Morgan Stanley and Air China

0.84

Correlation Coefficient

Morgan Stanley  Air China

Very poor diversification

The 3 months correlation between Morgan and Air is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Morgan Stanley Direct and Air China Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Air China Limited and Morgan Stanley 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 Morgan Stanley Direct are associated (or correlated) with Air China. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Air China Limited has no effect on the direction of Morgan Stanley i.e., Morgan Stanley and Air China go up and down completely randomly.

Pair Corralation between Morgan Stanley and Air China

Given the investment horizon of 90 days Morgan Stanley is expected to generate 3.54 times less return on investment than Air China. But when comparing it to its historical volatility, Morgan Stanley Direct is 3.07 times less risky than Air China. It trades about 0.09 of its potential returns per unit of risk. Air China Limited is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  59.00  in Air China Limited on September 23, 2024 and sell it today you would earn a total of  4.00  from holding Air China Limited or generate 6.78% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	95.45%
Values	Daily Returns

Morgan Stanley Direct  vs.  Air China Limited

Morgan Stanley Direct

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Morgan Stanley Direct are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite quite inconsistent fundamental indicators, Morgan Stanley may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Air China Limited

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Air China Limited are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Air China reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Morgan Stanley and Air China

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

The idea behind Morgan Stanley Direct and Air China Limited 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.