Correlation Between Huafa Industrial and China Fortune

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

By analyzing existing cross correlation between Huafa Industrial Co and China Fortune Land, you can compare the effects of market volatilities on Huafa Industrial and China Fortune 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 Huafa Industrial with a short position of China Fortune. Check out your portfolio center. Please also check ongoing floating volatility patterns of Huafa Industrial and China Fortune.

Diversification Opportunities for Huafa Industrial and China Fortune

0.66

Correlation Coefficient

Huafa Industrial  China Fortune

Poor diversification

The 3 months correlation between Huafa and China is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding Huafa Industrial Co and China Fortune Land in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Fortune Land and Huafa Industrial 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 Huafa Industrial Co are associated (or correlated) with China Fortune. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Fortune Land has no effect on the direction of Huafa Industrial i.e., Huafa Industrial and China Fortune go up and down completely randomly.

Pair Corralation between Huafa Industrial and China Fortune

Assuming the 90 days trading horizon Huafa Industrial is expected to generate 5.84 times less return on investment than China Fortune. But when comparing it to its historical volatility, Huafa Industrial Co is 2.12 times less risky than China Fortune. It trades about 0.13 of its potential returns per unit of risk. China Fortune Land is currently generating about 0.35 of returns per unit of risk over similar time horizon. If you would invest  104.00  in China Fortune Land on September 4, 2024 and sell it today you would earn a total of  245.00  from holding China Fortune Land or generate 235.58% return on investment over 90 days.

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

Huafa Industrial Co  vs.  China Fortune Land

Huafa Industrial

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Huafa Industrial Co are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Huafa Industrial sustained solid returns over the last few months and may actually be approaching a breakup point.

China Fortune Land

Risk-Adjusted Performance

27 of 100

Strong

Compared to the overall equity markets, risk-adjusted returns on investments in China Fortune Land are ranked lower than 27 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, China Fortune sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Huafa Industrial and China Fortune

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

The idea behind Huafa Industrial Co and China Fortune Land 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.