Correlation Between Dalian Thermal and Guangzhou Restaurants

Can any of the company-specific risk be diversified away by investing in both Dalian Thermal and Guangzhou Restaurants 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 Guangzhou Restaurants 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 Guangzhou Restaurants Group, you can compare the effects of market volatilities on Dalian Thermal and Guangzhou Restaurants 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 Guangzhou Restaurants. Check out your portfolio center. Please also check ongoing floating volatility patterns of Dalian Thermal and Guangzhou Restaurants.

Diversification Opportunities for Dalian Thermal and Guangzhou Restaurants

0.79

Correlation Coefficient

Dalian Thermal  Guangzhou Restaurants

Poor diversification

The 3 months correlation between Dalian and Guangzhou is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding Dalian Thermal Power and Guangzhou Restaurants Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Guangzhou Restaurants 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 Guangzhou Restaurants. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Guangzhou Restaurants has no effect on the direction of Dalian Thermal i.e., Dalian Thermal and Guangzhou Restaurants go up and down completely randomly.

Pair Corralation between Dalian Thermal and Guangzhou Restaurants

Assuming the 90 days trading horizon Dalian Thermal is expected to generate 1.43 times less return on investment than Guangzhou Restaurants. In addition to that, Dalian Thermal is 1.56 times more volatile than Guangzhou Restaurants Group. It trades about 0.06 of its total potential returns per unit of risk. Guangzhou Restaurants Group is currently generating about 0.13 per unit of volatility. If you would invest  1,390  in Guangzhou Restaurants Group on September 25, 2024 and sell it today you would earn a total of  299.00  from holding Guangzhou Restaurants Group or generate 21.51% return on investment over 90 days.

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

Dalian Thermal Power  vs.  Guangzhou Restaurants Group

Dalian Thermal Power

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Dalian Thermal Power are ranked lower than 4 (%) 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.

Guangzhou Restaurants

Risk-Adjusted Performance

10 of 100

OK

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

Pair Trading with Dalian Thermal and Guangzhou Restaurants

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

The idea behind Dalian Thermal Power and Guangzhou Restaurants Group 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.