Correlation Between China Merchants and Truist Financial

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

Diversification Opportunities for China Merchants and Truist Financial

0.26

Correlation Coefficient

China Merchants  Truist Financial

Modest diversification

The 3 months correlation between China and Truist is 0.26. Overlapping area represents the amount of risk that can be diversified away by holding China Merchants Bank and Truist Financial Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Truist Financial Corp 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 Truist Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Truist Financial Corp has no effect on the direction of China Merchants i.e., China Merchants and Truist Financial go up and down completely randomly.

Pair Corralation between China Merchants and Truist Financial

Assuming the 90 days horizon China Merchants is expected to generate 9.16 times less return on investment than Truist Financial. In addition to that, China Merchants is 1.25 times more volatile than Truist Financial Corp. It trades about 0.02 of its total potential returns per unit of risk. Truist Financial Corp is currently generating about 0.17 per unit of volatility. If you would invest  2,676  in Truist Financial Corp on January 25, 2024 and sell it today you would earn a total of  1,203  from holding Truist Financial Corp or generate 44.96% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	99.19%
Values	Daily Returns

China Merchants Bank  vs.  Truist Financial Corp

China Merchants Bank

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Bank are ranked lower than 12 (%) 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.

Truist Financial Corp

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Truist Financial Corp are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound technical and fundamental indicators, Truist Financial is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with China Merchants and Truist Financial

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

The idea behind China Merchants Bank and Truist Financial Corp 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.