Correlation Between Changchun Faway and Shenzhen Bingchuan

Can any of the company-specific risk be diversified away by investing in both Changchun Faway and Shenzhen Bingchuan 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 Shenzhen Bingchuan 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 Shenzhen Bingchuan Network, you can compare the effects of market volatilities on Changchun Faway and Shenzhen Bingchuan 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 Shenzhen Bingchuan. Check out your portfolio center. Please also check ongoing floating volatility patterns of Changchun Faway and Shenzhen Bingchuan.

Diversification Opportunities for Changchun Faway and Shenzhen Bingchuan

0.88

Correlation Coefficient

Changchun Faway  Shenzhen Bingchuan

Very poor diversification

The 3 months correlation between Changchun and Shenzhen is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Changchun Faway Automobile and Shenzhen Bingchuan Network in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Shenzhen Bingchuan 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 Shenzhen Bingchuan. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Shenzhen Bingchuan has no effect on the direction of Changchun Faway i.e., Changchun Faway and Shenzhen Bingchuan go up and down completely randomly.

Pair Corralation between Changchun Faway and Shenzhen Bingchuan

Assuming the 90 days trading horizon Changchun Faway is expected to generate 2.9 times less return on investment than Shenzhen Bingchuan. But when comparing it to its historical volatility, Changchun Faway Automobile is 2.09 times less risky than Shenzhen Bingchuan. It trades about 0.2 of its potential returns per unit of risk. Shenzhen Bingchuan Network is currently generating about 0.28 of returns per unit of risk over similar time horizon. If you would invest  1,303  in Shenzhen Bingchuan Network on September 17, 2024 and sell it today you would earn a total of  1,405  from holding Shenzhen Bingchuan Network or generate 107.83% return on investment over 90 days.

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

Changchun Faway Automobile  vs.  Shenzhen Bingchuan Network

Changchun Faway Auto

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Changchun Faway Automobile are ranked lower than 15 (%) 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.

Shenzhen Bingchuan

Risk-Adjusted Performance

21 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Shenzhen Bingchuan Network are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Shenzhen Bingchuan sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Changchun Faway and Shenzhen Bingchuan

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

The idea behind Changchun Faway Automobile and Shenzhen Bingchuan Network 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.