Correlation Between BRIT AMER and China BlueChemical

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

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

Diversification Opportunities for BRIT AMER and China BlueChemical

0.03

Correlation Coefficient

BRIT AMER  China BlueChemical

Significant diversification

The 3 months correlation between BRIT and China is 0.03. Overlapping area represents the amount of risk that can be diversified away by holding BRIT AMER TOBACCO and China BlueChemical in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China BlueChemical and BRIT AMER 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 BRIT AMER TOBACCO are associated (or correlated) with China BlueChemical. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China BlueChemical has no effect on the direction of BRIT AMER i.e., BRIT AMER and China BlueChemical go up and down completely randomly.

Pair Corralation between BRIT AMER and China BlueChemical

Assuming the 90 days trading horizon BRIT AMER is expected to generate 3.34 times less return on investment than China BlueChemical. But when comparing it to its historical volatility, BRIT AMER TOBACCO is 2.92 times less risky than China BlueChemical. It trades about 0.1 of its potential returns per unit of risk. China BlueChemical is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  20.00  in China BlueChemical on September 17, 2024 and sell it today you would earn a total of  5.00  from holding China BlueChemical or generate 25.0% return on investment over 90 days.

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

BRIT AMER TOBACCO  vs.  China BlueChemical

BRIT AMER TOBACCO

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in BRIT AMER TOBACCO are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, BRIT AMER may actually be approaching a critical reversion point that can send shares even higher in January 2025.

China BlueChemical

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in China BlueChemical are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady basic indicators, China BlueChemical reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with BRIT AMER and China BlueChemical

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

The idea behind BRIT AMER TOBACCO and China BlueChemical 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.