Correlation Between Wanhua Chemical and Hubei Xingfa

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

By analyzing existing cross correlation between Wanhua Chemical Group and Hubei Xingfa Chemicals, you can compare the effects of market volatilities on Wanhua Chemical and Hubei Xingfa 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 Wanhua Chemical with a short position of Hubei Xingfa. Check out your portfolio center. Please also check ongoing floating volatility patterns of Wanhua Chemical and Hubei Xingfa.

Diversification Opportunities for Wanhua Chemical and Hubei Xingfa

0.6

Correlation Coefficient

Wanhua Chemical  Hubei Xingfa

Poor diversification

The 3 months correlation between Wanhua and Hubei is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding Wanhua Chemical Group and Hubei Xingfa Chemicals in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Hubei Xingfa Chemicals and Wanhua Chemical 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 Wanhua Chemical Group are associated (or correlated) with Hubei Xingfa. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Hubei Xingfa Chemicals has no effect on the direction of Wanhua Chemical i.e., Wanhua Chemical and Hubei Xingfa go up and down completely randomly.

Pair Corralation between Wanhua Chemical and Hubei Xingfa

Assuming the 90 days trading horizon Wanhua Chemical is expected to generate 2.79 times less return on investment than Hubei Xingfa. But when comparing it to its historical volatility, Wanhua Chemical Group is 1.13 times less risky than Hubei Xingfa. It trades about 0.05 of its potential returns per unit of risk. Hubei Xingfa Chemicals is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  1,931  in Hubei Xingfa Chemicals on September 2, 2024 and sell it today you would earn a total of  383.00  from holding Hubei Xingfa Chemicals or generate 19.83% return on investment over 90 days.

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

Wanhua Chemical Group  vs.  Hubei Xingfa Chemicals

Wanhua Chemical Group

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Wanhua Chemical Group are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Wanhua Chemical may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Hubei Xingfa Chemicals

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Hubei Xingfa Chemicals are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Hubei Xingfa sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Wanhua Chemical and Hubei Xingfa

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

The idea behind Wanhua Chemical Group and Hubei Xingfa Chemicals 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 Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.