Correlation Between National Capital and China Merchants

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

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

Diversification Opportunities for National Capital and China Merchants

0.18

Correlation Coefficient

National Capital  China Merchants

Average diversification

The 3 months correlation between National and China is 0.18. Overlapping area represents the amount of risk that can be diversified away by holding National Capital Bank 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 National Capital 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 National Capital Bank 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 National Capital i.e., National Capital and China Merchants go up and down completely randomly.

Pair Corralation between National Capital and China Merchants

Given the investment horizon of 90 days National Capital Bank is expected to generate 48.2 times more return on investment than China Merchants. However, National Capital is 48.2 times more volatile than China Merchants Bank. It trades about 0.31 of its potential returns per unit of risk. China Merchants Bank is currently generating about 0.01 per unit of risk. If you would invest  16,500  in National Capital Bank on September 25, 2024 and sell it today you would lose (9,000) from holding National Capital Bank or give up 54.55% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	69.35%
Values	Daily Returns

National Capital Bank  vs.  China Merchants Bank

National Capital Bank

Risk-Adjusted Performance

22 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in National Capital Bank are ranked lower than 22 (%) of all global equities and portfolios over the last 90 days. Despite somewhat abnormal fundamental indicators, National Capital sustained solid returns over the last few months and may actually be approaching a breakup point.

China Merchants Bank

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Bank are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile forward-looking signals, China Merchants may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with National Capital and China Merchants

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

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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.