Correlation Between China Merchants and Ningxia Xiaoming

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

By analyzing existing cross correlation between China Merchants Bank and Ningxia Xiaoming Agriculture, you can compare the effects of market volatilities on China Merchants and Ningxia Xiaoming 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 Ningxia Xiaoming. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Merchants and Ningxia Xiaoming.

Diversification Opportunities for China Merchants and Ningxia Xiaoming

0.66

Correlation Coefficient

China Merchants  Ningxia Xiaoming

Poor diversification

The 3 months correlation between China and Ningxia is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding China Merchants Bank and Ningxia Xiaoming Agriculture in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ningxia Xiaoming Agr 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 Bank are associated (or correlated) with Ningxia Xiaoming. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ningxia Xiaoming Agr has no effect on the direction of China Merchants i.e., China Merchants and Ningxia Xiaoming go up and down completely randomly.

Pair Corralation between China Merchants and Ningxia Xiaoming

Assuming the 90 days trading horizon China Merchants is expected to generate 2.29 times less return on investment than Ningxia Xiaoming. But when comparing it to its historical volatility, China Merchants Bank is 2.24 times less risky than Ningxia Xiaoming. It trades about 0.05 of its potential returns per unit of risk. Ningxia Xiaoming Agriculture is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  1,155  in Ningxia Xiaoming Agriculture on September 29, 2024 and sell it today you would earn a total of  87.00  from holding Ningxia Xiaoming Agriculture or generate 7.53% return on investment over 90 days.

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

China Merchants Bank  vs.  Ningxia Xiaoming Agriculture

China Merchants Bank

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Bank are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, China Merchants is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Ningxia Xiaoming Agr

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Ningxia Xiaoming Agriculture are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Ningxia Xiaoming sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Merchants and Ningxia Xiaoming

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

The idea behind China Merchants Bank and Ningxia Xiaoming Agriculture 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.