Correlation Between Orient Overseas and China Merchants

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

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

Diversification Opportunities for Orient Overseas and China Merchants

0.61

Correlation Coefficient

Orient Overseas  China Merchants

Poor diversification

The 3 months correlation between Orient and China is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding Orient Overseas Limited and China Merchants Port in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Merchants Port and Orient Overseas 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 Orient Overseas Limited 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 Port has no effect on the direction of Orient Overseas i.e., Orient Overseas and China Merchants go up and down completely randomly.

Pair Corralation between Orient Overseas and China Merchants

Assuming the 90 days trading horizon Orient Overseas Limited is expected to generate 1.12 times more return on investment than China Merchants. However, Orient Overseas is 1.12 times more volatile than China Merchants Port. It trades about 0.05 of its potential returns per unit of risk. China Merchants Port is currently generating about 0.02 per unit of risk. If you would invest  1,265  in Orient Overseas Limited on October 14, 2024 and sell it today you would earn a total of  65.00  from holding Orient Overseas Limited or generate 5.14% return on investment over 90 days.

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

Orient Overseas Limited  vs.  China Merchants Port

Orient Overseas

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Orient Overseas Limited are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile forward indicators, Orient Overseas may actually be approaching a critical reversion point that can send shares even higher in February 2025.

China Merchants Port

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Port are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, China Merchants is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Orient Overseas and China Merchants

The main advantage of trading using opposite Orient Overseas and China Merchants positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Orient Overseas 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 Orient Overseas Limited and China Merchants Port 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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.