Correlation Between China Eastern and LATAM Airlines

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

By analyzing existing cross correlation between China Eastern Airlines and LATAM Airlines Group, you can compare the effects of market volatilities on China Eastern and LATAM Airlines 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 Eastern with a short position of LATAM Airlines. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Eastern and LATAM Airlines.

Diversification Opportunities for China Eastern and LATAM Airlines

-0.21

Correlation Coefficient

China Eastern  LATAM Airlines

Very good diversification

The 3 months correlation between China and LATAM is -0.21. Overlapping area represents the amount of risk that can be diversified away by holding China Eastern Airlines and LATAM Airlines Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LATAM Airlines Group and China Eastern 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 Eastern Airlines are associated (or correlated) with LATAM Airlines. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of LATAM Airlines Group has no effect on the direction of China Eastern i.e., China Eastern and LATAM Airlines go up and down completely randomly.

Pair Corralation between China Eastern and LATAM Airlines

Assuming the 90 days trading horizon China Eastern Airlines is expected to generate 1.19 times more return on investment than LATAM Airlines. However, China Eastern is 1.19 times more volatile than LATAM Airlines Group. It trades about 0.1 of its potential returns per unit of risk. LATAM Airlines Group is currently generating about -0.02 per unit of risk. If you would invest  22.00  in China Eastern Airlines on February 27, 2024 and sell it today you would earn a total of  3.00  from holding China Eastern Airlines or generate 13.64% return on investment over 90 days.

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

China Eastern Airlines  vs.  LATAM Airlines Group

China Eastern Airlines

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in China Eastern Airlines are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, China Eastern reported solid returns over the last few months and may actually be approaching a breakup point.

LATAM Airlines Group

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days LATAM Airlines Group has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Pair Trading with China Eastern and LATAM Airlines

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

The idea behind China Eastern Airlines and LATAM Airlines Group 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.

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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.