Correlation Between Dalian Thermal and XCMG Construction

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

By analyzing existing cross correlation between Dalian Thermal Power and XCMG Construction Machinery, you can compare the effects of market volatilities on Dalian Thermal and XCMG Construction 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 Dalian Thermal with a short position of XCMG Construction. Check out your portfolio center. Please also check ongoing floating volatility patterns of Dalian Thermal and XCMG Construction.

Diversification Opportunities for Dalian Thermal and XCMG Construction

0.85

Correlation Coefficient

Dalian Thermal  XCMG Construction

Very poor diversification

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

Pair Corralation between Dalian Thermal and XCMG Construction

Assuming the 90 days trading horizon Dalian Thermal Power is expected to generate 1.83 times more return on investment than XCMG Construction. However, Dalian Thermal is 1.83 times more volatile than XCMG Construction Machinery. It trades about 0.11 of its potential returns per unit of risk. XCMG Construction Machinery is currently generating about 0.09 per unit of risk. If you would invest  613.00  in Dalian Thermal Power on September 23, 2024 and sell it today you would earn a total of  156.00  from holding Dalian Thermal Power or generate 25.45% return on investment over 90 days.

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

Dalian Thermal Power  vs.  XCMG Construction Machinery

Dalian Thermal Power

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Dalian Thermal Power are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Dalian Thermal sustained solid returns over the last few months and may actually be approaching a breakup point.

XCMG Construction

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in XCMG Construction Machinery are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, XCMG Construction sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Dalian Thermal and XCMG Construction

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

The idea behind Dalian Thermal Power and XCMG Construction Machinery 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 Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.