Correlation Between China Development and Hanover Insurance

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

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

Diversification Opportunities for China Development and Hanover Insurance

-0.6

Correlation Coefficient

China Development  Hanover Insurance

Excellent diversification

The 3 months correlation between China and Hanover is -0.6. Overlapping area represents the amount of risk that can be diversified away by holding China Development Bank and The Hanover Insurance in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Hanover Insurance and China Development 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 Development Bank are associated (or correlated) with Hanover Insurance. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Hanover Insurance has no effect on the direction of China Development i.e., China Development and Hanover Insurance go up and down completely randomly.

Pair Corralation between China Development and Hanover Insurance

Assuming the 90 days trading horizon China Development Bank is expected to generate 1.91 times more return on investment than Hanover Insurance. However, China Development is 1.91 times more volatile than The Hanover Insurance. It trades about 0.21 of its potential returns per unit of risk. The Hanover Insurance is currently generating about -0.01 per unit of risk. If you would invest  12.00  in China Development Bank on April 25, 2025 and sell it today you would earn a total of  6.00  from holding China Development Bank or generate 50.0% return on investment over 90 days.

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

China Development Bank  vs.  The Hanover Insurance

China Development Bank

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in China Development Bank are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively fragile basic indicators, China Development unveiled solid returns over the last few months and may actually be approaching a breakup point.

Hanover Insurance

Risk-Adjusted Performance

Very Weak

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

Pair Trading with China Development and Hanover Insurance

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

The idea behind China Development Bank and The Hanover Insurance 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.