Correlation Between China Merchants and Community West

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

Diversification Opportunities for China Merchants and Community West

-0.49

Correlation Coefficient

China Merchants  Community West

Very good diversification

The 3 months correlation between China and Community is -0.49. Overlapping area represents the amount of risk that can be diversified away by holding China Merchants Bank and Community West Bancshares in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Community West Bancshares 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 Community West. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Community West Bancshares has no effect on the direction of China Merchants i.e., China Merchants and Community West go up and down completely randomly.

Pair Corralation between China Merchants and Community West

Assuming the 90 days horizon China Merchants Bank is expected to generate 2.84 times more return on investment than Community West. However, China Merchants is 2.84 times more volatile than Community West Bancshares. It trades about 0.14 of its potential returns per unit of risk. Community West Bancshares is currently generating about 0.1 per unit of risk. If you would invest  1,855  in China Merchants Bank on September 12, 2024 and sell it today you would earn a total of  692.00  from holding China Merchants Bank or generate 37.3% return on investment over 90 days.

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

China Merchants Bank  vs.  Community West Bancshares

China Merchants Bank

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Bank are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile forward-looking signals, China Merchants showed solid returns over the last few months and may actually be approaching a breakup point.

Community West Bancshares

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Community West Bancshares are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of rather conflicting fundamental drivers, Community West may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with China Merchants and Community West

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

The idea behind China Merchants Bank and Community West Bancshares 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.