Correlation Between China Merchants and China National

Can any of the company-specific risk be diversified away by investing in both China Merchants and China National 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 China National 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 China National Software, you can compare the effects of market volatilities on China Merchants and China National 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 China National. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Merchants and China National.

Diversification Opportunities for China Merchants and China National

0.64

Correlation Coefficient

China Merchants  China National

Poor diversification

The 3 months correlation between China and China is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding China Merchants Bank and China National Software in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China National Software 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 China National. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China National Software has no effect on the direction of China Merchants i.e., China Merchants and China National go up and down completely randomly.

Pair Corralation between China Merchants and China National

Assuming the 90 days trading horizon China Merchants is expected to generate 2.27 times less return on investment than China National. But when comparing it to its historical volatility, China Merchants Bank is 2.02 times less risky than China National. It trades about 0.2 of its potential returns per unit of risk. China National Software is currently generating about 0.23 of returns per unit of risk over similar time horizon. If you would invest  3,303  in China National Software on September 12, 2024 and sell it today you would earn a total of  2,296  from holding China National Software or generate 69.51% 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.  China National Software

China Merchants Bank

Risk-Adjusted Performance

15 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Bank are ranked lower than 15 (%) 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.

China National Software

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in China National Software are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, China National sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Merchants and China National

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

The idea behind China Merchants Bank and China National Software 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.