Correlation Between Industrial and China Construction

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

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

Diversification Opportunities for Industrial and China Construction

0.56

Correlation Coefficient

Industrial  China Construction

Very weak diversification

The 3 months correlation between Industrial and China is 0.56. Overlapping area represents the amount of risk that can be diversified away by holding Industrial and Commercial and China Construction Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Construction Bank and Industrial 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 Industrial and Commercial are associated (or correlated) with China Construction. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Construction Bank has no effect on the direction of Industrial i.e., Industrial and China Construction go up and down completely randomly.

Pair Corralation between Industrial and China Construction

Assuming the 90 days horizon Industrial is expected to generate 2.14 times less return on investment than China Construction. But when comparing it to its historical volatility, Industrial and Commercial is 1.51 times less risky than China Construction. It trades about 0.05 of its potential returns per unit of risk. China Construction Bank is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  72.00  in China Construction Bank on August 30, 2024 and sell it today you would earn a total of  8.00  from holding China Construction Bank or generate 11.11% return on investment over 90 days.

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

Industrial and Commercial  vs.  China Construction Bank

Industrial and Commercial

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Industrial and Commercial are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile fundamental drivers, Industrial may actually be approaching a critical reversion point that can send shares even higher in December 2024.

China Construction Bank

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in China Construction Bank are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak technical indicators, China Construction reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Industrial and China Construction

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

The idea behind Industrial and Commercial and China Construction Bank 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..