Correlation Between Pacific Basin and China Merchants

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

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

Diversification Opportunities for Pacific Basin and China Merchants

-0.05

Correlation Coefficient

Pacific Basin  China Merchants

Good diversification

The 3 months correlation between Pacific and China is -0.05. Overlapping area represents the amount of risk that can be diversified away by holding Pacific Basin Shipping 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 Pacific Basin 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 Pacific Basin Shipping 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 Pacific Basin i.e., Pacific Basin and China Merchants go up and down completely randomly.

Pair Corralation between Pacific Basin and China Merchants

Assuming the 90 days horizon Pacific Basin Shipping is expected to under-perform the China Merchants. In addition to that, Pacific Basin is 3.13 times more volatile than China Merchants Port. It trades about -0.09 of its total potential returns per unit of risk. China Merchants Port is currently generating about 0.08 per unit of volatility. If you would invest  1,618  in China Merchants Port on October 6, 2024 and sell it today you would earn a total of  52.00  from holding China Merchants Port or generate 3.21% return on investment over 90 days.

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

Pacific Basin Shipping  vs.  China Merchants Port

Pacific Basin Shipping

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Pacific Basin Shipping has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's fundamental drivers remain fairly strong which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

China Merchants Port

Risk-Adjusted Performance

6 of 100

Modest

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

Pair Trading with Pacific Basin and China Merchants

The main advantage of trading using opposite Pacific Basin and China Merchants positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Pacific Basin 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 Pacific Basin Shipping 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.