Correlation Between China Merchants and Financial Street

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

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

Diversification Opportunities for China Merchants and Financial Street

0.7

Correlation Coefficient

China Merchants  Financial Street

Poor diversification

The 3 months correlation between China and Financial is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding China Merchants Shekou and Financial Street Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Financial Street Holdings and China Merchants 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 China Merchants Shekou are associated (or correlated) with Financial Street. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Financial Street Holdings has no effect on the direction of China Merchants i.e., China Merchants and Financial Street go up and down completely randomly.

Pair Corralation between China Merchants and Financial Street

Assuming the 90 days trading horizon China Merchants Shekou is expected to under-perform the Financial Street. But the stock apears to be less risky and, when comparing its historical volatility, China Merchants Shekou is 1.64 times less risky than Financial Street. The stock trades about -0.09 of its potential returns per unit of risk. The Financial Street Holdings is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  350.00  in Financial Street Holdings on September 30, 2024 and sell it today you would earn a total of  1.00  from holding Financial Street Holdings or generate 0.29% return on investment over 90 days.

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

China Merchants Shekou  vs.  Financial Street Holdings

China Merchants Shekou

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days China Merchants Shekou has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's basic indicators remain somewhat strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Financial Street Holdings

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Financial Street Holdings are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Financial Street may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with China Merchants and Financial Street

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

The idea behind China Merchants Shekou and Financial Street Holdings 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.