Correlation Between China Merchants and Merchants Bancorp

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

Diversification Opportunities for China Merchants and Merchants Bancorp

0.63
  Correlation Coefficient

Poor diversification

The 3 months correlation between China and Merchants is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding China Merchants Bank and Merchants Bancorp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merchants Bancorp 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 Merchants Bancorp. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Merchants Bancorp has no effect on the direction of China Merchants i.e., China Merchants and Merchants Bancorp go up and down completely randomly.

Pair Corralation between China Merchants and Merchants Bancorp

Assuming the 90 days horizon China Merchants Bank is expected to generate 0.24 times more return on investment than Merchants Bancorp. However, China Merchants Bank is 4.13 times less risky than Merchants Bancorp. It trades about 0.21 of its potential returns per unit of risk. Merchants Bancorp is currently generating about 0.0 per unit of risk. If you would invest  388.00  in China Merchants Bank on December 29, 2023 and sell it today you would earn a total of  5.00  from holding China Merchants Bank or generate 1.29% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

China Merchants Bank  vs.  Merchants Bancorp

 Performance 
       Timeline  
China Merchants Bank 

Risk-Adjusted Performance

14 of 100

 
Low
 
High
Good
Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Bank are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak technical indicators, China Merchants reported solid returns over the last few months and may actually be approaching a breakup point.
Merchants Bancorp 

Risk-Adjusted Performance

8 of 100

 
Low
 
High
Modest
Compared to the overall equity markets, risk-adjusted returns on investments in Merchants Bancorp are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, Merchants Bancorp may actually be approaching a critical reversion point that can send shares even higher in April 2024.

China Merchants and Merchants Bancorp Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with China Merchants and Merchants Bancorp

The main advantage of trading using opposite China Merchants and Merchants Bancorp positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if China Merchants position performs unexpectedly, Merchants Bancorp 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 Merchants Bancorp will offset losses from the drop in Merchants Bancorp's long position.
The idea behind China Merchants Bank and Merchants Bancorp 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.

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