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 Bank, 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

0.12

Correlation Coefficient

PetroChina  China Merchants

Average diversification

The 3 months correlation between PetroChina and China is 0.12. Overlapping area represents the amount of risk that can be diversified away by holding PetroChina Co Ltd and China Merchants Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Merchants Bank 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 Bank 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 Co Ltd is expected to under-perform the China Merchants. In addition to that, PetroChina is 1.03 times more volatile than China Merchants Bank. It trades about -0.07 of its total potential returns per unit of risk. China Merchants Bank is currently generating about 0.11 per unit of volatility. If you would invest  3,215  in China Merchants Bank on August 30, 2024 and sell it today you would earn a total of  432.00  from holding China Merchants Bank or generate 13.44% return on investment over 90 days.

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

PetroChina Co Ltd  vs.  China Merchants Bank

PetroChina

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days PetroChina Co Ltd has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

China Merchants Bank

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Bank are ranked lower than 8 (%) 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.

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 Bank 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.