Correlation Between China Life and Long Yuan

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

By analyzing existing cross correlation between China Life Insurance and Long Yuan Construction, you can compare the effects of market volatilities on China Life and Long Yuan 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 Life with a short position of Long Yuan. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Life and Long Yuan.

Diversification Opportunities for China Life and Long Yuan

0.86

Correlation Coefficient

China Life  Long Yuan

Very poor diversification

The 3 months correlation between China and Long is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding China Life Insurance and Long Yuan Construction in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Long Yuan Construction and China Life 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 Life Insurance are associated (or correlated) with Long Yuan. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Long Yuan Construction has no effect on the direction of China Life i.e., China Life and Long Yuan go up and down completely randomly.

Pair Corralation between China Life and Long Yuan

Assuming the 90 days trading horizon China Life is expected to generate 2.2 times less return on investment than Long Yuan. But when comparing it to its historical volatility, China Life Insurance is 1.16 times less risky than Long Yuan. It trades about 0.14 of its potential returns per unit of risk. Long Yuan Construction is currently generating about 0.27 of returns per unit of risk over similar time horizon. If you would invest  245.00  in Long Yuan Construction on September 12, 2024 and sell it today you would earn a total of  182.00  from holding Long Yuan Construction or generate 74.29% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.28%
Values	Daily Returns

China Life Insurance  vs.  Long Yuan Construction

China Life Insurance

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in China Life Insurance are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, China Life sustained solid returns over the last few months and may actually be approaching a breakup point.

Long Yuan Construction

Risk-Adjusted Performance

21 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Long Yuan Construction are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Long Yuan sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Life and Long Yuan

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

The idea behind China Life Insurance and Long Yuan Construction 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.