Correlation Between China Railway and Industrial

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

By analyzing existing cross correlation between China Railway Construction and Industrial and Commercial, you can compare the effects of market volatilities on China Railway and Industrial 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 Railway with a short position of Industrial. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Railway and Industrial.

Diversification Opportunities for China Railway and Industrial

0.66

Correlation Coefficient

China Railway  Industrial

Poor diversification

The 3 months correlation between China and Industrial is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding China Railway Construction and Industrial and Commercial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Industrial and Commercial and China Railway 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 Railway Construction are associated (or correlated) with Industrial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Industrial and Commercial has no effect on the direction of China Railway i.e., China Railway and Industrial go up and down completely randomly.

Pair Corralation between China Railway and Industrial

Assuming the 90 days trading horizon China Railway is expected to generate 1.33 times less return on investment than Industrial. In addition to that, China Railway is 1.67 times more volatile than Industrial and Commercial. It trades about 0.03 of its total potential returns per unit of risk. Industrial and Commercial is currently generating about 0.07 per unit of volatility. If you would invest  544.00  in Industrial and Commercial on September 1, 2024 and sell it today you would earn a total of  71.00  from holding Industrial and Commercial or generate 13.05% return on investment over 90 days.

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

China Railway Construction  vs.  Industrial and Commercial

China Railway Constr

Risk-Adjusted Performance

10 of 100

OK

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

Industrial and Commercial

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Industrial and Commercial are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Industrial is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with China Railway and Industrial

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

The idea behind China Railway Construction and Industrial and Commercial 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.