Correlation Between PetroChina and China Merchants

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

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

Diversification Opportunities for PetroChina and China Merchants

0.31

Correlation Coefficient

PetroChina  China Merchants

Weak diversification

The 3 months correlation between PetroChina and China is 0.31. Overlapping area represents the amount of risk that can be diversified away by holding PetroChina Co Ltd 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 PetroChina 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 PetroChina Co Ltd 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 PetroChina i.e., PetroChina and China Merchants go up and down completely randomly.

Pair Corralation between PetroChina and China Merchants

Assuming the 90 days trading horizon PetroChina is expected to generate 2.0 times less return on investment than China Merchants. But when comparing it to its historical volatility, PetroChina Co Ltd is 1.56 times less risky than China Merchants. It trades about 0.05 of its potential returns per unit of risk. China Merchants Shekou is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  960.00  in China Merchants Shekou on September 25, 2024 and sell it today you would earn a total of  83.00  from holding China Merchants Shekou or generate 8.65% return on investment over 90 days.

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

PetroChina Co Ltd  vs.  China Merchants Shekou

PetroChina

Risk-Adjusted Performance

3 of 100

Weak

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

China Merchants Shekou

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Shekou are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, China Merchants may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with PetroChina and China Merchants

The main advantage of trading using opposite PetroChina and China Merchants positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if PetroChina 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 PetroChina Co Ltd 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.

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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.