Correlation Between China Natural and Energy

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

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

Diversification Opportunities for China Natural and Energy

0.07

Correlation Coefficient

China Natural  Energy

Significant diversification

The 3 months correlation between China and Energy is 0.07. Overlapping area represents the amount of risk that can be diversified away by holding China Natural Resources and Energy and Water in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Energy and Water and China Natural 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 China Natural Resources are associated (or correlated) with Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Energy and Water has no effect on the direction of China Natural i.e., China Natural and Energy go up and down completely randomly.

Pair Corralation between China Natural and Energy

Given the investment horizon of 90 days China Natural Resources is expected to generate 0.51 times more return on investment than Energy. However, China Natural Resources is 1.96 times less risky than Energy. It trades about 0.02 of its potential returns per unit of risk. Energy and Water is currently generating about -0.07 per unit of risk. If you would invest  61.00  in China Natural Resources on September 20, 2024 and sell it today you would lose (4.85) from holding China Natural Resources or give up 7.95% of portfolio value over 90 days.

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

China Natural Resources  vs.  Energy and Water

China Natural Resources

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in China Natural Resources are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Even with relatively abnormal basic indicators, China Natural may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Energy and Water

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Energy and Water has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's basic indicators remain rather sound which may send shares a bit higher in January 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Pair Trading with China Natural and Energy

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

The idea behind China Natural Resources and Energy and Water 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.