Correlation Between Shaanxi Construction and Chengdu Kanghua

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Can any of the company-specific risk be diversified away by investing in both Shaanxi Construction and Chengdu Kanghua 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 Shaanxi Construction and Chengdu Kanghua into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Shaanxi Construction Machinery and Chengdu Kanghua Biological, you can compare the effects of market volatilities on Shaanxi Construction and Chengdu Kanghua 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 Shaanxi Construction with a short position of Chengdu Kanghua. Check out your portfolio center. Please also check ongoing floating volatility patterns of Shaanxi Construction and Chengdu Kanghua.

Diversification Opportunities for Shaanxi Construction and Chengdu Kanghua

0.67
  Correlation Coefficient

Poor diversification

The 3 months correlation between Shaanxi and Chengdu is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding Shaanxi Construction Machinery and Chengdu Kanghua Biological in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Chengdu Kanghua Biol and Shaanxi Construction 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 Shaanxi Construction Machinery are associated (or correlated) with Chengdu Kanghua. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Chengdu Kanghua Biol has no effect on the direction of Shaanxi Construction i.e., Shaanxi Construction and Chengdu Kanghua go up and down completely randomly.

Pair Corralation between Shaanxi Construction and Chengdu Kanghua

Assuming the 90 days trading horizon Shaanxi Construction Machinery is expected to generate 1.14 times more return on investment than Chengdu Kanghua. However, Shaanxi Construction is 1.14 times more volatile than Chengdu Kanghua Biological. It trades about -0.07 of its potential returns per unit of risk. Chengdu Kanghua Biological is currently generating about -0.09 per unit of risk. If you would invest  369.00  in Shaanxi Construction Machinery on September 6, 2024 and sell it today you would lose (19.00) from holding Shaanxi Construction Machinery or give up 5.15% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

Shaanxi Construction Machinery  vs.  Chengdu Kanghua Biological

 Performance 
       Timeline  
Shaanxi Construction 

Risk-Adjusted Performance

16 of 100

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

Risk-Adjusted Performance

7 of 100

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

Shaanxi Construction and Chengdu Kanghua Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Shaanxi Construction and Chengdu Kanghua

The main advantage of trading using opposite Shaanxi Construction and Chengdu Kanghua positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Shaanxi Construction position performs unexpectedly, Chengdu Kanghua 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 Chengdu Kanghua will offset losses from the drop in Chengdu Kanghua's long position.
The idea behind Shaanxi Construction Machinery and Chengdu Kanghua Biological 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.

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