Correlation Between Digital China and China Steel

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

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

Diversification Opportunities for Digital China and China Steel

-0.57

Correlation Coefficient

Digital China  China Steel

Excellent diversification

The 3 months correlation between Digital and China is -0.57. Overlapping area represents the amount of risk that can be diversified away by holding Digital China Holdings and China Steel Structure in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Steel Structure and Digital 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 Digital China Holdings are associated (or correlated) with China Steel. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Steel Structure has no effect on the direction of Digital China i.e., Digital China and China Steel go up and down completely randomly.

Pair Corralation between Digital China and China Steel

Assuming the 90 days trading horizon Digital China Holdings is expected to generate 3.48 times more return on investment than China Steel. However, Digital China is 3.48 times more volatile than China Steel Structure. It trades about 0.07 of its potential returns per unit of risk. China Steel Structure is currently generating about -0.1 per unit of risk. If you would invest  654.00  in Digital China Holdings on September 25, 2024 and sell it today you would earn a total of  69.00  from holding Digital China Holdings or generate 10.55% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	100.0%
Values	Daily Returns

Digital China Holdings  vs.  China Steel Structure

Digital China Holdings

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Digital China Holdings are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite somewhat abnormal basic indicators, Digital China may actually be approaching a critical reversion point that can send shares even higher in January 2025.

China Steel Structure

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days China Steel Structure has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, China Steel is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Pair Trading with Digital China and China Steel

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

The idea behind Digital China Holdings and China Steel Structure 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 ETFs module to find actively traded Exchange Traded Funds (ETF) from around the world.