Correlation Between China Southern and Cathay Pacific

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

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

Diversification Opportunities for China Southern and Cathay Pacific

0.56

Correlation Coefficient

China Southern  Cathay Pacific

Very weak diversification

The 3 months correlation between China and Cathay is 0.56. Overlapping area represents the amount of risk that can be diversified away by holding China Southern Airlines and Cathay Pacific Airways in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cathay Pacific Airways and China Southern 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 Southern Airlines are associated (or correlated) with Cathay Pacific. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cathay Pacific Airways has no effect on the direction of China Southern i.e., China Southern and Cathay Pacific go up and down completely randomly.

Pair Corralation between China Southern and Cathay Pacific

If you would invest  531.00  in Cathay Pacific Airways on February 26, 2024 and sell it today you would earn a total of  4.00  from holding Cathay Pacific Airways or generate 0.75% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	4.76%
Values	Daily Returns

China Southern Airlines  vs.  Cathay Pacific Airways

China Southern Airlines

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days China Southern Airlines has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong basic indicators, China Southern is not utilizing all of its potentials. The latest stock price confusion, may contribute to short-horizon losses for the traders.

Cathay Pacific Airways

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Cathay Pacific Airways are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile basic indicators, Cathay Pacific may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Pair Trading with China Southern and Cathay Pacific

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

The idea behind China Southern Airlines and Cathay Pacific Airways 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 Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.