Correlation Between Amazon and China Merchants

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Can any of the company-specific risk be diversified away by investing in both Amazon 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 Amazon and China Merchants into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Amazon Inc and China Merchants Bank, you can compare the effects of market volatilities on Amazon 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 Amazon with a short position of China Merchants. Check out your portfolio center. Please also check ongoing floating volatility patterns of Amazon and China Merchants.

Diversification Opportunities for Amazon and China Merchants

0.25
  Correlation Coefficient

Modest diversification

The 3 months correlation between Amazon and China is 0.25. Overlapping area represents the amount of risk that can be diversified away by holding Amazon Inc 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 Amazon 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 Amazon Inc 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 Amazon i.e., Amazon and China Merchants go up and down completely randomly.

Pair Corralation between Amazon and China Merchants

Given the investment horizon of 90 days Amazon is expected to generate 5.24 times less return on investment than China Merchants. But when comparing it to its historical volatility, Amazon Inc is 1.06 times less risky than China Merchants. It trades about 0.08 of its potential returns per unit of risk. China Merchants Bank is currently generating about 0.4 of returns per unit of risk over similar time horizon. If you would invest  1,887  in China Merchants Bank on September 10, 2022 and sell it today you would earn a total of  646.00  from holding China Merchants Bank or generate 34.23% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Weak
Accuracy100.0%
ValuesDaily Returns

Amazon Inc  vs.  China Merchants Bank

 Performance (%) 
       Timeline  
Amazon Inc 
Amazon Performance
0 of 100
Over the last 90 days Amazon Inc has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's basic indicators remain quite persistent which may send shares a bit higher in January 2023. The latest mess may also be a sign of long-standing up-swing for the company institutional investors.

Amazon Price Channel

China Merchants Bank 
China Performance
1 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Bank are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong forward-looking signals, China Merchants is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

China Price Channel

Amazon and China Merchants Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Amazon and China Merchants

The main advantage of trading using opposite Amazon and China Merchants positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Amazon 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.
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The idea behind Amazon Inc 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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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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.

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