Correlation Between China Asset and China Petroleum

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

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

Diversification Opportunities for China Asset and China Petroleum

0.06

Correlation Coefficient

China Asset  China Petroleum

Significant diversification

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

Pair Corralation between China Asset and China Petroleum

Assuming the 90 days trading horizon China Asset is expected to generate 1.53 times less return on investment than China Petroleum. But when comparing it to its historical volatility, China Asset Management is 1.92 times less risky than China Petroleum. It trades about 0.08 of its potential returns per unit of risk. China Petroleum Chemical is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  426.00  in China Petroleum Chemical on September 24, 2024 and sell it today you would earn a total of  212.00  from holding China Petroleum Chemical or generate 49.77% return on investment over 90 days.

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

China Asset Management  vs.  China Petroleum Chemical

China Asset Management

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in China Asset Management are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, China Asset may actually be approaching a critical reversion point that can send shares even higher in January 2025.

China Petroleum Chemical

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days China Petroleum Chemical has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, China Petroleum is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with China Asset and China Petroleum

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

The idea behind China Asset Management and China Petroleum 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .