Correlation Between New China and Datang HuaYin

Can any of the company-specific risk be diversified away by investing in both New China and Datang HuaYin 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 Datang HuaYin 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 Datang HuaYin Electric, you can compare the effects of market volatilities on New China and Datang HuaYin 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 Datang HuaYin. Check out your portfolio center. Please also check ongoing floating volatility patterns of New China and Datang HuaYin.

Diversification Opportunities for New China and Datang HuaYin

0.8

Correlation Coefficient

New China  Datang HuaYin

Very poor diversification

The 3 months correlation between New and Datang is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding New China Life and Datang HuaYin Electric in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Datang HuaYin Electric 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 Datang HuaYin. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Datang HuaYin Electric has no effect on the direction of New China i.e., New China and Datang HuaYin go up and down completely randomly.

Pair Corralation between New China and Datang HuaYin

Assuming the 90 days trading horizon New China Life is expected to generate 1.2 times more return on investment than Datang HuaYin. However, New China is 1.2 times more volatile than Datang HuaYin Electric. It trades about 0.07 of its potential returns per unit of risk. Datang HuaYin Electric is currently generating about -0.01 per unit of risk. If you would invest  4,642  in New China Life on September 28, 2024 and sell it today you would earn a total of  455.00  from holding New China Life or generate 9.8% return on investment over 90 days.

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

New China Life  vs.  Datang HuaYin Electric

New China Life

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in New China Life are ranked lower than 5 (%) 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.

Datang HuaYin Electric

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Datang HuaYin Electric has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Datang HuaYin 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 Datang HuaYin

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

The idea behind New China Life and Datang HuaYin 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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.