Correlation Between Guangdong Electric and XCMG Construction

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

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

Diversification Opportunities for Guangdong Electric and XCMG Construction

0.72

Correlation Coefficient

Guangdong Electric  XCMG Construction

Poor diversification

The 3 months correlation between Guangdong and XCMG is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Guangdong Electric Power and XCMG Construction Machinery in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on XCMG Construction and Guangdong Electric 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 Guangdong Electric Power are associated (or correlated) with XCMG Construction. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of XCMG Construction has no effect on the direction of Guangdong Electric i.e., Guangdong Electric and XCMG Construction go up and down completely randomly.

Pair Corralation between Guangdong Electric and XCMG Construction

Assuming the 90 days trading horizon Guangdong Electric is expected to generate 1.98 times less return on investment than XCMG Construction. But when comparing it to its historical volatility, Guangdong Electric Power is 2.2 times less risky than XCMG Construction. It trades about 0.1 of its potential returns per unit of risk. XCMG Construction Machinery is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  660.00  in XCMG Construction Machinery on September 23, 2024 and sell it today you would earn a total of  84.00  from holding XCMG Construction Machinery or generate 12.73% return on investment over 90 days.

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

Guangdong Electric Power  vs.  XCMG Construction Machinery

Guangdong Electric Power

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Guangdong Electric Power are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Guangdong Electric may actually be approaching a critical reversion point that can send shares even higher in January 2025.

XCMG Construction

Risk-Adjusted Performance

7 of 100

OK

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

Pair Trading with Guangdong Electric and XCMG Construction

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

The idea behind Guangdong Electric Power and XCMG 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.

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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.