Correlation Between China Merchants and 1st Colonial

Can any of the company-specific risk be diversified away by investing in both China Merchants and 1st Colonial 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 1st Colonial 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 1st Colonial Bancorp, you can compare the effects of market volatilities on China Merchants and 1st Colonial 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 1st Colonial. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Merchants and 1st Colonial.

Diversification Opportunities for China Merchants and 1st Colonial

0.62

Correlation Coefficient

China Merchants  1st Colonial

Poor diversification

The 3 months correlation between China and 1st is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding China Merchants Bank and 1st Colonial Bancorp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on 1st Colonial 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 1st Colonial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of 1st Colonial Bancorp has no effect on the direction of China Merchants i.e., China Merchants and 1st Colonial go up and down completely randomly.

Pair Corralation between China Merchants and 1st Colonial

Assuming the 90 days horizon China Merchants Bank is expected to generate 2.75 times more return on investment than 1st Colonial. However, China Merchants is 2.75 times more volatile than 1st Colonial Bancorp. It trades about 0.37 of its potential returns per unit of risk. 1st Colonial Bancorp is currently generating about -0.14 per unit of risk. If you would invest  1,963  in China Merchants Bank on February 4, 2024 and sell it today you would earn a total of  370.00  from holding China Merchants Bank or generate 18.85% return on investment over 90 days.

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

China Merchants Bank  vs.  1st Colonial Bancorp

China Merchants Bank

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Bank are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak forward-looking signals, China Merchants showed solid returns over the last few months and may actually be approaching a breakup point.

1st Colonial Bancorp

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in 1st Colonial Bancorp are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, 1st Colonial sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Merchants and 1st Colonial

The main advantage of trading using opposite China Merchants and 1st Colonial positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if China Merchants position performs unexpectedly, 1st Colonial 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 1st Colonial will offset losses from the drop in 1st Colonial's long position.

The idea behind China Merchants Bank and 1st Colonial 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 Companies Directory module to evaluate performance of over 100,000 Stocks, Funds, and ETFs against different fundamentals.