Correlation Between Dongfeng Automobile and China Merchants

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

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

Diversification Opportunities for Dongfeng Automobile and China Merchants

0.77

Correlation Coefficient

Dongfeng Automobile  China Merchants

Poor diversification

The 3 months correlation between Dongfeng and China is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Dongfeng Automobile Co and China Merchants Shekou in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Merchants Shekou and Dongfeng Automobile 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 Dongfeng Automobile Co 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 Shekou has no effect on the direction of Dongfeng Automobile i.e., Dongfeng Automobile and China Merchants go up and down completely randomly.

Pair Corralation between Dongfeng Automobile and China Merchants

Assuming the 90 days trading horizon Dongfeng Automobile is expected to generate 1.07 times less return on investment than China Merchants. In addition to that, Dongfeng Automobile is 1.05 times more volatile than China Merchants Shekou. It trades about 0.14 of its total potential returns per unit of risk. China Merchants Shekou is currently generating about 0.15 per unit of volatility. If you would invest  903.00  in China Merchants Shekou on September 5, 2024 and sell it today you would earn a total of  282.00  from holding China Merchants Shekou or generate 31.23% return on investment over 90 days.

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

Dongfeng Automobile Co  vs.  China Merchants Shekou

Dongfeng Automobile

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Dongfeng Automobile Co are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Dongfeng Automobile sustained solid returns over the last few months and may actually be approaching a breakup point.

China Merchants Shekou

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Shekou are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, China Merchants sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Dongfeng Automobile and China Merchants

The main advantage of trading using opposite Dongfeng Automobile and China Merchants positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Dongfeng Automobile 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 Dongfeng Automobile Co and China Merchants Shekou 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.