Correlation Between Linzhou Heavy and Ningbo Jianan

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

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

Diversification Opportunities for Linzhou Heavy and Ningbo Jianan

0.88

Correlation Coefficient

Linzhou Heavy  Ningbo Jianan

Very poor diversification

The 3 months correlation between Linzhou and Ningbo is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Linzhou Heavy Machinery and Ningbo Jianan Electronics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ningbo Jianan Electronics and Linzhou 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 Linzhou Heavy Machinery are associated (or correlated) with Ningbo Jianan. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ningbo Jianan Electronics has no effect on the direction of Linzhou Heavy i.e., Linzhou Heavy and Ningbo Jianan go up and down completely randomly.

Pair Corralation between Linzhou Heavy and Ningbo Jianan

Assuming the 90 days trading horizon Linzhou Heavy is expected to generate 1.25 times less return on investment than Ningbo Jianan. But when comparing it to its historical volatility, Linzhou Heavy Machinery is 1.34 times less risky than Ningbo Jianan. It trades about 0.1 of its potential returns per unit of risk. Ningbo Jianan Electronics is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  1,850  in Ningbo Jianan Electronics on September 25, 2024 and sell it today you would earn a total of  402.00  from holding Ningbo Jianan Electronics or generate 21.73% return on investment over 90 days.

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

Linzhou Heavy Machinery  vs.  Ningbo Jianan Electronics

Linzhou Heavy Machinery

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Linzhou Heavy Machinery are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Linzhou Heavy sustained solid returns over the last few months and may actually be approaching a breakup point.

Ningbo Jianan Electronics

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Ningbo Jianan Electronics are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Ningbo Jianan sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Linzhou Heavy and Ningbo Jianan

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

The idea behind Linzhou Heavy Machinery and Ningbo Jianan Electronics 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.