Correlation Between Tompkins Financial and China Merchants

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

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

Diversification Opportunities for Tompkins Financial and China Merchants

-0.13

Correlation Coefficient

Tompkins Financial  China Merchants

Good diversification

The 3 months correlation between Tompkins and China is -0.13. Overlapping area represents the amount of risk that can be diversified away by holding Tompkins Financial 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 Tompkins Financial 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 Tompkins Financial 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 Tompkins Financial i.e., Tompkins Financial and China Merchants go up and down completely randomly.

Pair Corralation between Tompkins Financial and China Merchants

Considering the 90-day investment horizon Tompkins Financial is expected to generate 1.23 times less return on investment than China Merchants. But when comparing it to its historical volatility, Tompkins Financial is 1.04 times less risky than China Merchants. It trades about 0.01 of its potential returns per unit of risk. China Merchants Bank is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  2,492  in China Merchants Bank on September 20, 2024 and sell it today you would lose (94.00) from holding China Merchants Bank or give up 3.77% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	99.8%
Values	Daily Returns

Tompkins Financial  vs.  China Merchants Bank

Tompkins Financial

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Tompkins Financial are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Even with relatively unsteady primary indicators, Tompkins Financial reported solid returns over the last few months and may actually be approaching a breakup point.

China Merchants Bank

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Bank are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak forward-looking signals, China Merchants showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Tompkins Financial and China Merchants

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

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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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.