Correlation Between Korea Electric and China Merchants

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

By analyzing existing cross correlation between Korea Electric Power and China Merchants Bank, you can compare the effects of market volatilities on Korea Electric and China Merchants 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 Korea Electric with a short position of China Merchants. Check out your portfolio center. Please also check ongoing floating volatility patterns of Korea Electric and China Merchants.

Diversification Opportunities for Korea Electric and China Merchants

-0.52

Correlation Coefficient

Korea Electric  China Merchants

Excellent diversification

The 3 months correlation between Korea and China is -0.52. Overlapping area represents the amount of risk that can be diversified away by holding Korea Electric Power and China Merchants Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Merchants Bank and Korea Electric 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 Korea Electric Power are associated (or correlated) with China Merchants. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Merchants Bank has no effect on the direction of Korea Electric i.e., Korea Electric and China Merchants go up and down completely randomly.

Pair Corralation between Korea Electric and China Merchants

Considering the 90-day investment horizon Korea Electric Power is expected to under-perform the China Merchants. In addition to that, Korea Electric is 1.11 times more volatile than China Merchants Bank. It trades about -0.15 of its total potential returns per unit of risk. China Merchants Bank is currently generating about 0.09 per unit of volatility. If you would invest  2,008  in China Merchants Bank on March 12, 2024 and sell it today you would earn a total of  221.00  from holding China Merchants Bank or generate 11.01% return on investment over 90 days.

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

Korea Electric Power  vs.  China Merchants Bank

Korea Electric Power

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Korea Electric Power has generated negative risk-adjusted returns adding no value to investors with long positions. Even with uncertain performance in the last few months, the Stock's technical and fundamental indicators remain relatively invariable which may send shares a bit higher in July 2024. The latest agitation may also be a sign of long-running up-swing for the enterprise retail investors.

China Merchants Bank

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Bank are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak forward-looking signals, China Merchants may actually be approaching a critical reversion point that can send shares even higher in July 2024.

Pair Trading with Korea Electric and China Merchants

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

The idea behind Korea Electric Power and China Merchants Bank 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.