Correlation Between China Merchants and US Bancorp

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

Diversification Opportunities for China Merchants and US Bancorp

0.28

Correlation Coefficient

China Merchants  US Bancorp

Modest diversification

The 3 months correlation between China and USB is 0.28. Overlapping area represents the amount of risk that can be diversified away by holding China Merchants Bank and US Bancorp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on US 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 US Bancorp. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of US Bancorp has no effect on the direction of China Merchants i.e., China Merchants and US Bancorp go up and down completely randomly.

Pair Corralation between China Merchants and US Bancorp

Assuming the 90 days horizon China Merchants Bank is expected to under-perform the US Bancorp. In addition to that, China Merchants is 1.11 times more volatile than US Bancorp. It trades about 0.0 of its total potential returns per unit of risk. US Bancorp is currently generating about 0.08 per unit of volatility. If you would invest  3,067  in US Bancorp on January 24, 2024 and sell it today you would earn a total of  1,038  from holding US Bancorp or generate 33.84% return on investment over 90 days.

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

China Merchants Bank  vs.  US Bancorp

China Merchants Bank

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Bank are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of fairly unsteady forward-looking signals, China Merchants showed solid returns over the last few months and may actually be approaching a breakup point.

US Bancorp

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days US Bancorp has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, US Bancorp is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with China Merchants and US Bancorp

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

The idea behind China Merchants Bank and US 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.