Correlation Between New China and Inner Mongolia

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

By analyzing existing cross correlation between New China Life and Inner Mongolia Yuan, you can compare the effects of market volatilities on New China and Inner Mongolia 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 New China with a short position of Inner Mongolia. Check out your portfolio center. Please also check ongoing floating volatility patterns of New China and Inner Mongolia.

Diversification Opportunities for New China and Inner Mongolia

0.73

Correlation Coefficient

New China  Inner Mongolia

Poor diversification

The 3 months correlation between New and Inner is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding New China Life and Inner Mongolia Yuan in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Inner Mongolia Yuan and New China 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 New China Life are associated (or correlated) with Inner Mongolia. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Inner Mongolia Yuan has no effect on the direction of New China i.e., New China and Inner Mongolia go up and down completely randomly.

Pair Corralation between New China and Inner Mongolia

Assuming the 90 days trading horizon New China Life is expected to generate 1.18 times more return on investment than Inner Mongolia. However, New China is 1.18 times more volatile than Inner Mongolia Yuan. It trades about 0.19 of its potential returns per unit of risk. Inner Mongolia Yuan is currently generating about 0.01 per unit of risk. If you would invest  3,285  in New China Life on September 3, 2024 and sell it today you would earn a total of  1,451  from holding New China Life or generate 44.17% return on investment over 90 days.

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

New China Life  vs.  Inner Mongolia Yuan

New China Life

Risk-Adjusted Performance

15 of 100

Good

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

Inner Mongolia Yuan

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Inner Mongolia Yuan are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Inner Mongolia is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with New China and Inner Mongolia

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

The idea behind New China Life and Inner Mongolia Yuan 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.