Correlation Between Cathay Financial and China Steel

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

By analyzing existing cross correlation between Cathay Financial Holding and China Steel Chemical, you can compare the effects of market volatilities on Cathay Financial and China Steel 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 Cathay Financial with a short position of China Steel. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cathay Financial and China Steel.

Diversification Opportunities for Cathay Financial and China Steel

0.06

Correlation Coefficient

Cathay Financial  China Steel

Significant diversification

The 3 months correlation between Cathay and China is 0.06. Overlapping area represents the amount of risk that can be diversified away by holding Cathay Financial Holding and China Steel Chemical in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Steel Chemical and Cathay Financial 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 Cathay Financial Holding are associated (or correlated) with China Steel. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Steel Chemical has no effect on the direction of Cathay Financial i.e., Cathay Financial and China Steel go up and down completely randomly.

Pair Corralation between Cathay Financial and China Steel

Assuming the 90 days trading horizon Cathay Financial Holding is expected to generate 1.26 times more return on investment than China Steel. However, Cathay Financial is 1.26 times more volatile than China Steel Chemical. It trades about 0.15 of its potential returns per unit of risk. China Steel Chemical is currently generating about 0.01 per unit of risk. If you would invest  6,250  in Cathay Financial Holding on September 7, 2024 and sell it today you would earn a total of  670.00  from holding Cathay Financial Holding or generate 10.72% return on investment over 90 days.

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

Cathay Financial Holding  vs.  China Steel Chemical

Cathay Financial Holding

Risk-Adjusted Performance

11 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Cathay Financial Holding are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal basic indicators, Cathay Financial may actually be approaching a critical reversion point that can send shares even higher in January 2025.

China Steel Chemical

Risk-Adjusted Performance

0 of 100

Weak

Over the last 90 days China Steel Chemical has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, China Steel is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Pair Trading with Cathay Financial and China Steel

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

The idea behind Cathay Financial Holding and China Steel Chemical 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 Global Markets Map module to get a quick overview of global market snapshot using zoomable world map. Drill down to check world indexes.