Correlation Between Prudential PLC and China Life

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

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

Diversification Opportunities for Prudential PLC and China Life

0.81

Correlation Coefficient

Prudential PLC  China Life

Very poor diversification

The 3 months correlation between Prudential and China is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Prudential PLC ADR and China Life Insurance in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Life Insurance and Prudential PLC 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 Prudential PLC ADR are associated (or correlated) with China Life. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Life Insurance has no effect on the direction of Prudential PLC i.e., Prudential PLC and China Life go up and down completely randomly.

Pair Corralation between Prudential PLC and China Life

Considering the 90-day investment horizon Prudential PLC ADR is expected to generate 0.78 times more return on investment than China Life. However, Prudential PLC ADR is 1.29 times less risky than China Life. It trades about 0.27 of its potential returns per unit of risk. China Life Insurance is currently generating about 0.03 per unit of risk. If you would invest  1,561  in Prudential PLC ADR on December 30, 2024 and sell it today you would earn a total of  582.00  from holding Prudential PLC ADR or generate 37.28% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.39%
Values	Daily Returns

Prudential PLC ADR  vs.  China Life Insurance

Prudential PLC ADR

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Prudential PLC ADR are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. Despite quite conflicting basic indicators, Prudential PLC disclosed solid returns over the last few months and may actually be approaching a breakup point.

China Life Insurance

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in China Life Insurance are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable forward-looking indicators, China Life is not utilizing all of its potentials. The recent stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Prudential PLC and China Life

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

The idea behind Prudential PLC ADR and China Life Insurance 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.