Correlation Between China Aluminum and Sichuan Changhong

Can any of the company-specific risk be diversified away by investing in both China Aluminum and Sichuan Changhong 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 China Aluminum and Sichuan Changhong into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between China Aluminum International and Sichuan Changhong Electric, you can compare the effects of market volatilities on China Aluminum and Sichuan Changhong 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 China Aluminum with a short position of Sichuan Changhong. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Aluminum and Sichuan Changhong.

Diversification Opportunities for China Aluminum and Sichuan Changhong

0.74

Correlation Coefficient

China Aluminum  Sichuan Changhong

Poor diversification

The 3 months correlation between China and Sichuan is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding China Aluminum International and Sichuan Changhong Electric in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sichuan Changhong and China Aluminum 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 China Aluminum International are associated (or correlated) with Sichuan Changhong. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sichuan Changhong has no effect on the direction of China Aluminum i.e., China Aluminum and Sichuan Changhong go up and down completely randomly.

Pair Corralation between China Aluminum and Sichuan Changhong

Assuming the 90 days trading horizon China Aluminum International is expected to under-perform the Sichuan Changhong. But the stock apears to be less risky and, when comparing its historical volatility, China Aluminum International is 2.22 times less risky than Sichuan Changhong. The stock trades about -0.01 of its potential returns per unit of risk. The Sichuan Changhong Electric is currently generating about 0.2 of returns per unit of risk over similar time horizon. If you would invest  591.00  in Sichuan Changhong Electric on September 30, 2024 and sell it today you would earn a total of  487.00  from holding Sichuan Changhong Electric or generate 82.4% return on investment over 90 days.

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

China Aluminum International  vs.  Sichuan Changhong Electric

China Aluminum Inter

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days China Aluminum International has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, China Aluminum is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Sichuan Changhong

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Sichuan Changhong Electric are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Sichuan Changhong sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Aluminum and Sichuan Changhong

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

The idea behind China Aluminum International and Sichuan Changhong Electric 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.

Check out your portfolio center.

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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.