Correlation Between Nestle SA and China Mengniu

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

By analyzing existing cross correlation between Nestle SA ADR and China Mengniu Dairy, you can compare the effects of market volatilities on Nestle SA and China Mengniu 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 Nestle SA with a short position of China Mengniu. Check out your portfolio center. Please also check ongoing floating volatility patterns of Nestle SA and China Mengniu.

Diversification Opportunities for Nestle SA and China Mengniu

0.89

Correlation Coefficient

Nestle SA  China Mengniu

Very poor diversification

The 3 months correlation between Nestle and China is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Nestle SA ADR and China Mengniu Dairy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Mengniu Dairy and Nestle SA 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 Nestle SA ADR are associated (or correlated) with China Mengniu. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Mengniu Dairy has no effect on the direction of Nestle SA i.e., Nestle SA and China Mengniu go up and down completely randomly.

Pair Corralation between Nestle SA and China Mengniu

Assuming the 90 days horizon Nestle SA ADR is expected to generate 0.5 times more return on investment than China Mengniu. However, Nestle SA ADR is 2.0 times less risky than China Mengniu. It trades about 0.24 of its potential returns per unit of risk. China Mengniu Dairy is currently generating about 0.08 per unit of risk. If you would invest  8,228  in Nestle SA ADR on December 29, 2024 and sell it today you would earn a total of  1,983  from holding Nestle SA ADR or generate 24.1% return on investment over 90 days.

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

Nestle SA ADR  vs.  China Mengniu Dairy

Nestle SA ADR

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Nestle SA ADR are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. In spite of fairly conflicting technical and fundamental indicators, Nestle SA showed solid returns over the last few months and may actually be approaching a breakup point.

China Mengniu Dairy

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in China Mengniu Dairy are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak fundamental indicators, China Mengniu showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Nestle SA and China Mengniu

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

The idea behind Nestle SA ADR and China Mengniu Dairy 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 Stock Screener module to find equities using a custom stock filter or screen asymmetry in trading patterns, price, volume, or investment outlook..