Correlation Between Dongfeng Automobile and Hainan Airlines

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

By analyzing existing cross correlation between Dongfeng Automobile Co and Hainan Airlines Co, you can compare the effects of market volatilities on Dongfeng Automobile and Hainan Airlines 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 Dongfeng Automobile with a short position of Hainan Airlines. Check out your portfolio center. Please also check ongoing floating volatility patterns of Dongfeng Automobile and Hainan Airlines.

Diversification Opportunities for Dongfeng Automobile and Hainan Airlines

0.85

Correlation Coefficient

Dongfeng Automobile  Hainan Airlines

Very poor diversification

The 3 months correlation between Dongfeng and Hainan is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Dongfeng Automobile Co and Hainan Airlines Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Hainan Airlines and Dongfeng Automobile 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 Dongfeng Automobile Co are associated (or correlated) with Hainan Airlines. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Hainan Airlines has no effect on the direction of Dongfeng Automobile i.e., Dongfeng Automobile and Hainan Airlines go up and down completely randomly.

Pair Corralation between Dongfeng Automobile and Hainan Airlines

Assuming the 90 days trading horizon Dongfeng Automobile is expected to generate 2.03 times less return on investment than Hainan Airlines. But when comparing it to its historical volatility, Dongfeng Automobile Co is 1.32 times less risky than Hainan Airlines. It trades about 0.17 of its potential returns per unit of risk. Hainan Airlines Co is currently generating about 0.26 of returns per unit of risk over similar time horizon. If you would invest  103.00  in Hainan Airlines Co on September 13, 2024 and sell it today you would earn a total of  95.00  from holding Hainan Airlines Co or generate 92.23% return on investment over 90 days.

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

Dongfeng Automobile Co  vs.  Hainan Airlines Co

Dongfeng Automobile

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Dongfeng Automobile Co are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Dongfeng Automobile sustained solid returns over the last few months and may actually be approaching a breakup point.

Hainan Airlines

Risk-Adjusted Performance

20 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Hainan Airlines Co are ranked lower than 20 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Hainan Airlines sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Dongfeng Automobile and Hainan Airlines

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

The idea behind Dongfeng Automobile Co and Hainan Airlines Co 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 Positions Ratings module to determine portfolio positions ratings based on digital equity recommendations. Macroaxis instant position ratings are based on combination of fundamental analysis and risk-adjusted market performance.