Correlation Between Changchun Faway and Hongrun Construction

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

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

Diversification Opportunities for Changchun Faway and Hongrun Construction

0.94

Correlation Coefficient

Changchun Faway  Hongrun Construction

Almost no diversification

The 3 months correlation between Changchun and Hongrun is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Changchun Faway Automobile and Hongrun Construction Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Hongrun Construction and Changchun Faway 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 Changchun Faway Automobile are associated (or correlated) with Hongrun Construction. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Hongrun Construction has no effect on the direction of Changchun Faway i.e., Changchun Faway and Hongrun Construction go up and down completely randomly.

Pair Corralation between Changchun Faway and Hongrun Construction

Assuming the 90 days trading horizon Changchun Faway is expected to generate 1.78 times less return on investment than Hongrun Construction. But when comparing it to its historical volatility, Changchun Faway Automobile is 1.28 times less risky than Hongrun Construction. It trades about 0.21 of its potential returns per unit of risk. Hongrun Construction Group is currently generating about 0.29 of returns per unit of risk over similar time horizon. If you would invest  319.00  in Hongrun Construction Group on September 14, 2024 and sell it today you would earn a total of  193.00  from holding Hongrun Construction Group or generate 60.5% return on investment over 90 days.

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

Changchun Faway Automobile  vs.  Hongrun Construction Group

Changchun Faway Auto

Risk-Adjusted Performance

16 of 100

Solid

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

Hongrun Construction

Risk-Adjusted Performance

22 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Hongrun Construction Group are ranked lower than 22 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Hongrun Construction sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Changchun Faway and Hongrun Construction

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

The idea behind Changchun Faway Automobile and Hongrun Construction 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 Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.