Correlation Between Lutian Machinery and Sanan Optoelectronics

Can any of the company-specific risk be diversified away by investing in both Lutian Machinery and Sanan Optoelectronics 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 Sanan Optoelectronics 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 Sanan Optoelectronics Co, you can compare the effects of market volatilities on Lutian Machinery and Sanan Optoelectronics 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 Sanan Optoelectronics. Check out your portfolio center. Please also check ongoing floating volatility patterns of Lutian Machinery and Sanan Optoelectronics.

Diversification Opportunities for Lutian Machinery and Sanan Optoelectronics

0.77

Correlation Coefficient

Lutian Machinery  Sanan Optoelectronics

Poor diversification

The 3 months correlation between Lutian and Sanan is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Lutian Machinery Co and Sanan Optoelectronics Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sanan Optoelectronics 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 Sanan Optoelectronics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sanan Optoelectronics has no effect on the direction of Lutian Machinery i.e., Lutian Machinery and Sanan Optoelectronics go up and down completely randomly.

Pair Corralation between Lutian Machinery and Sanan Optoelectronics

Assuming the 90 days trading horizon Lutian Machinery is expected to generate 1.26 times less return on investment than Sanan Optoelectronics. But when comparing it to its historical volatility, Lutian Machinery Co is 1.23 times less risky than Sanan Optoelectronics. It trades about 0.16 of its potential returns per unit of risk. Sanan Optoelectronics Co is currently generating about 0.17 of returns per unit of risk over similar time horizon. If you would invest  977.00  in Sanan Optoelectronics Co on September 22, 2024 and sell it today you would earn a total of  308.00  from holding Sanan Optoelectronics Co or generate 31.53% return on investment over 90 days.

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

Lutian Machinery Co  vs.  Sanan Optoelectronics Co

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.

Sanan Optoelectronics

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Sanan Optoelectronics Co are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Sanan Optoelectronics sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Lutian Machinery and Sanan Optoelectronics

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

The idea behind Lutian Machinery Co and Sanan Optoelectronics Co 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.