Correlation Between Guangdong Liantai and Shanghai Ziyan

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

By analyzing existing cross correlation between Guangdong Liantai Environmental and Shanghai Ziyan Foods, you can compare the effects of market volatilities on Guangdong Liantai and Shanghai Ziyan 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 Guangdong Liantai with a short position of Shanghai Ziyan. Check out your portfolio center. Please also check ongoing floating volatility patterns of Guangdong Liantai and Shanghai Ziyan.

Diversification Opportunities for Guangdong Liantai and Shanghai Ziyan

0.85

Correlation Coefficient

Guangdong Liantai  Shanghai Ziyan

Very poor diversification

The 3 months correlation between Guangdong and Shanghai is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Guangdong Liantai Environmenta and Shanghai Ziyan Foods in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Shanghai Ziyan Foods and Guangdong Liantai 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 Guangdong Liantai Environmental are associated (or correlated) with Shanghai Ziyan. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Shanghai Ziyan Foods has no effect on the direction of Guangdong Liantai i.e., Guangdong Liantai and Shanghai Ziyan go up and down completely randomly.

Pair Corralation between Guangdong Liantai and Shanghai Ziyan

Assuming the 90 days trading horizon Guangdong Liantai is expected to generate 1.43 times less return on investment than Shanghai Ziyan. But when comparing it to its historical volatility, Guangdong Liantai Environmental is 1.76 times less risky than Shanghai Ziyan. It trades about 0.13 of its potential returns per unit of risk. Shanghai Ziyan Foods is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  1,768  in Shanghai Ziyan Foods on September 23, 2024 and sell it today you would earn a total of  131.00  from holding Shanghai Ziyan Foods or generate 7.41% return on investment over 90 days.

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

Guangdong Liantai Environmenta  vs.  Shanghai Ziyan Foods

Guangdong Liantai

Risk-Adjusted Performance

15 of 100

Good

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

Shanghai Ziyan Foods

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Shanghai Ziyan Foods are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Shanghai Ziyan sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Guangdong Liantai and Shanghai Ziyan

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

The idea behind Guangdong Liantai Environmental and Shanghai Ziyan Foods 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.