Correlation Between Exxon and China Merchants
Can any of the company-specific risk be diversified away by investing in both Exxon 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 Exxon and China Merchants into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Exxon Mobil Corp and China Merchants Bank, you can compare the effects of market volatilities on Exxon 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 Exxon with a short position of China Merchants. Check out your portfolio center. Please also check ongoing floating volatility patterns of Exxon and China Merchants.
Diversification Opportunities for Exxon and China Merchants
0.79 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Exxon and China is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding Exxon Mobil Corp 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 Exxon 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 Exxon Mobil Corp 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 Exxon i.e., Exxon and China Merchants go up and down completely randomly.
Pair Corralation between Exxon and China Merchants
Considering the 90-day investment horizon Exxon Mobil Corp is expected to generate 0.55 times more return on investment than China Merchants. However, Exxon Mobil Corp is 1.81 times less risky than China Merchants. It trades about 0.04 of its potential returns per unit of risk. China Merchants Bank is currently generating about 0.01 per unit of risk. If you would invest 9,714 in Exxon Mobil Corp on August 27, 2024 and sell it today you would earn a total of 2,465 from holding Exxon Mobil Corp or generate 25.38% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Exxon Mobil Corp vs. China Merchants Bank
Performance |
| Timeline |
| Exxon Mobil Corp |
| China Merchants Bank |
Exxon and China Merchants Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Exxon and China Merchants
The main advantage of trading using opposite Exxon and China Merchants positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Exxon 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 Exxon Mobil Corp 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.| China Merchants vs. China Everbright Bank | China Merchants vs. China Merchants Bank | China Merchants vs. Postal Savings Bank | China Merchants vs. China Citic Bank |
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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.
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