Correlation Between Lutian Machinery and Aba Chemicals

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

By analyzing existing cross correlation between Lutian Machinery Co and Aba Chemicals Corp, you can compare the effects of market volatilities on Lutian Machinery and Aba Chemicals 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 Lutian Machinery with a short position of Aba Chemicals. Check out your portfolio center. Please also check ongoing floating volatility patterns of Lutian Machinery and Aba Chemicals.

Diversification Opportunities for Lutian Machinery and Aba Chemicals

0.88

Correlation Coefficient

Lutian Machinery  Aba Chemicals

Very poor diversification

The 3 months correlation between Lutian and Aba is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Lutian Machinery Co and Aba Chemicals Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Aba Chemicals Corp and Lutian Machinery 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 Lutian Machinery Co are associated (or correlated) with Aba Chemicals. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Aba Chemicals Corp has no effect on the direction of Lutian Machinery i.e., Lutian Machinery and Aba Chemicals go up and down completely randomly.

Pair Corralation between Lutian Machinery and Aba Chemicals

Assuming the 90 days trading horizon Lutian Machinery is expected to generate 2.14 times less return on investment than Aba Chemicals. But when comparing it to its historical volatility, Lutian Machinery Co is 2.24 times less risky than Aba Chemicals. It trades about 0.16 of its potential returns per unit of risk. Aba Chemicals Corp is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest  531.00  in Aba Chemicals Corp on September 3, 2024 and sell it today you would earn a total of  269.00  from holding Aba Chemicals Corp or generate 50.66% return on investment over 90 days.

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

Lutian Machinery Co  vs.  Aba Chemicals Corp

Lutian Machinery

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Lutian Machinery Co are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Lutian Machinery sustained solid returns over the last few months and may actually be approaching a breakup point.

Aba Chemicals Corp

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Aba Chemicals Corp are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Aba Chemicals sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Lutian Machinery and Aba Chemicals

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

The idea behind Lutian Machinery Co and Aba Chemicals Corp 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.