Correlation Between Air China and China Southern

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

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

Diversification Opportunities for Air China and China Southern

0.72

Correlation Coefficient

Air China  China Southern

Poor diversification

The 3 months correlation between Air and China is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Air China Limited and China Southern Airlines in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Southern Airlines and Air China 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 Air China Limited are associated (or correlated) with China Southern. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Southern Airlines has no effect on the direction of Air China i.e., Air China and China Southern go up and down completely randomly.

Pair Corralation between Air China and China Southern

Assuming the 90 days horizon Air China is expected to generate 4.55 times less return on investment than China Southern. But when comparing it to its historical volatility, Air China Limited is 1.1 times less risky than China Southern. It trades about 0.01 of its potential returns per unit of risk. China Southern Airlines is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  37.00  in China Southern Airlines on February 19, 2024 and sell it today you would earn a total of  1.00  from holding China Southern Airlines or generate 2.7% return on investment over 90 days.

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

Air China Limited  vs.  China Southern Airlines

Air China Limited

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Air China Limited has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Air China is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

China Southern Airlines

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in China Southern Airlines are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile technical indicators, China Southern may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Pair Trading with Air China and China Southern

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

The idea behind Air China Limited and China Southern Airlines 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..