Correlation Between China Life and Shanghai Rongtai

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

Diversification Opportunities for China Life and Shanghai Rongtai

0.88

Correlation Coefficient

China Life  Shanghai Rongtai

Very poor diversification

The 3 months correlation between China and Shanghai is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding China Life Insurance and Shanghai Rongtai Health in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Shanghai Rongtai Health 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 Shanghai Rongtai. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Shanghai Rongtai Health has no effect on the direction of China Life i.e., China Life and Shanghai Rongtai go up and down completely randomly.

Pair Corralation between China Life and Shanghai Rongtai

Assuming the 90 days trading horizon China Life is expected to generate 1.02 times less return on investment than Shanghai Rongtai. In addition to that, China Life is 1.29 times more volatile than Shanghai Rongtai Health. It trades about 0.12 of its total potential returns per unit of risk. Shanghai Rongtai Health is currently generating about 0.16 per unit of volatility. If you would invest  1,188  in Shanghai Rongtai Health on September 3, 2024 and sell it today you would earn a total of  298.00  from holding Shanghai Rongtai Health or generate 25.08% return on investment over 90 days.

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

China Life Insurance  vs.  Shanghai Rongtai Health

China Life Insurance

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in China Life Insurance are ranked lower than 9 (%) 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.

Shanghai Rongtai Health

Risk-Adjusted Performance

12 of 100

Good

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

Pair Trading with China Life and Shanghai Rongtai

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

The idea behind China Life Insurance and Shanghai Rongtai Health 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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.