Correlation Between Weichai Heavy and Shaanxi Construction

Can any of the company-specific risk be diversified away by investing in both Weichai Heavy and Shaanxi Construction 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 Weichai Heavy and Shaanxi Construction into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Weichai Heavy Machinery and Shaanxi Construction Machinery, you can compare the effects of market volatilities on Weichai Heavy and Shaanxi Construction 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 Weichai Heavy with a short position of Shaanxi Construction. Check out your portfolio center. Please also check ongoing floating volatility patterns of Weichai Heavy and Shaanxi Construction.

Diversification Opportunities for Weichai Heavy and Shaanxi Construction

0.5

Correlation Coefficient

Weichai Heavy  Shaanxi Construction

Very weak diversification

The 3 months correlation between Weichai and Shaanxi is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding Weichai Heavy Machinery and Shaanxi Construction Machinery in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Shaanxi Construction and Weichai Heavy 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 Weichai Heavy Machinery are associated (or correlated) with Shaanxi Construction. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Shaanxi Construction has no effect on the direction of Weichai Heavy i.e., Weichai Heavy and Shaanxi Construction go up and down completely randomly.

Pair Corralation between Weichai Heavy and Shaanxi Construction

Assuming the 90 days trading horizon Weichai Heavy Machinery is expected to generate 1.09 times more return on investment than Shaanxi Construction. However, Weichai Heavy is 1.09 times more volatile than Shaanxi Construction Machinery. It trades about 0.24 of its potential returns per unit of risk. Shaanxi Construction Machinery is currently generating about 0.09 per unit of risk. If you would invest  1,030  in Weichai Heavy Machinery on September 28, 2024 and sell it today you would earn a total of  880.00  from holding Weichai Heavy Machinery or generate 85.44% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.33%
Values	Daily Returns

Weichai Heavy Machinery  vs.  Shaanxi Construction Machinery

Weichai Heavy Machinery

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Weichai Heavy Machinery are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Weichai Heavy sustained solid returns over the last few months and may actually be approaching a breakup point.

Shaanxi Construction

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Shaanxi Construction Machinery are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Shaanxi Construction sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Weichai Heavy and Shaanxi Construction

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

The idea behind Weichai Heavy Machinery and Shaanxi Construction Machinery 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 Sign In To Macroaxis module to sign in to explore Macroaxis' wealth optimization platform and fintech modules.