Correlation Between Shanghai Construction and China Railway

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

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

Diversification Opportunities for Shanghai Construction and China Railway

0.96

Correlation Coefficient

Shanghai Construction  China Railway

Almost no diversification

The 3 months correlation between Shanghai and China is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Shanghai Construction Group and China Railway Construction in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Railway Constr and Shanghai Construction 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 Shanghai Construction Group are associated (or correlated) with China Railway. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Railway Constr has no effect on the direction of Shanghai Construction i.e., Shanghai Construction and China Railway go up and down completely randomly.

Pair Corralation between Shanghai Construction and China Railway

Assuming the 90 days trading horizon Shanghai Construction Group is expected to generate 1.11 times more return on investment than China Railway. However, Shanghai Construction is 1.11 times more volatile than China Railway Construction. It trades about 0.21 of its potential returns per unit of risk. China Railway Construction is currently generating about 0.21 per unit of risk. If you would invest  193.00  in Shanghai Construction Group on September 15, 2024 and sell it today you would earn a total of  87.00  from holding Shanghai Construction Group or generate 45.08% return on investment over 90 days.

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

Shanghai Construction Group  vs.  China Railway Construction

Shanghai Construction

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Shanghai Construction Group are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Shanghai Construction sustained solid returns over the last few months and may actually be approaching a breakup point.

China Railway Constr

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in China Railway Construction are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, China Railway sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Shanghai Construction and China Railway

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

The idea behind Shanghai Construction Group and China Railway Construction 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.