Correlation Between Industrial and China Railway

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

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

Diversification Opportunities for Industrial and China Railway

0.71

Correlation Coefficient

Industrial  China Railway

Poor diversification

The 3 months correlation between Industrial and China is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding Industrial and Commercial and China Railway Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Railway Group and Industrial 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 Industrial and Commercial are associated (or correlated) with China Railway. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Railway Group has no effect on the direction of Industrial i.e., Industrial and China Railway go up and down completely randomly.

Pair Corralation between Industrial and China Railway

Assuming the 90 days trading horizon Industrial is expected to generate 4.38 times less return on investment than China Railway. But when comparing it to its historical volatility, Industrial and Commercial is 1.87 times less risky than China Railway. It trades about 0.05 of its potential returns per unit of risk. China Railway Group is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  547.00  in China Railway Group on September 1, 2024 and sell it today you would earn a total of  94.00  from holding China Railway Group or generate 17.18% return on investment over 90 days.

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

Industrial and Commercial  vs.  China Railway Group

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.

China Railway Group

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in China Railway Group are ranked lower than 8 (%) 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.

Pair Trading with Industrial and China Railway

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

The idea behind Industrial and Commercial and China Railway Group 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 Share Portfolio module to track or share privately all of your investments from the convenience of any device.