Correlation Between Sun Hung and China Overseas

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

By analyzing existing cross correlation between Sun Hung Kai and China Overseas Land, you can compare the effects of market volatilities on Sun Hung and China Overseas 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 Sun Hung with a short position of China Overseas. Check out your portfolio center. Please also check ongoing floating volatility patterns of Sun Hung and China Overseas.

Diversification Opportunities for Sun Hung and China Overseas

0.69

Correlation Coefficient

Sun Hung  China Overseas

Poor diversification

The 3 months correlation between Sun and China is 0.69. Overlapping area represents the amount of risk that can be diversified away by holding Sun Hung Kai and China Overseas Land in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Overseas Land and Sun Hung 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 Sun Hung Kai are associated (or correlated) with China Overseas. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Overseas Land has no effect on the direction of Sun Hung i.e., Sun Hung and China Overseas go up and down completely randomly.

Pair Corralation between Sun Hung and China Overseas

Assuming the 90 days horizon Sun Hung is expected to generate 1.85 times less return on investment than China Overseas. But when comparing it to its historical volatility, Sun Hung Kai is 1.21 times less risky than China Overseas. It trades about 0.05 of its potential returns per unit of risk. China Overseas Land is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  740.00  in China Overseas Land on September 3, 2024 and sell it today you would earn a total of  114.00  from holding China Overseas Land or generate 15.41% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	96.88%
Values	Daily Returns

Sun Hung Kai  vs.  China Overseas Land

Sun Hung Kai

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Sun Hung Kai are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak forward-looking indicators, Sun Hung may actually be approaching a critical reversion point that can send shares even higher in January 2025.

China Overseas Land

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in China Overseas Land are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, China Overseas showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Sun Hung and China Overseas

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

The idea behind Sun Hung Kai and China Overseas Land 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.