Correlation Between Peabody Energy and China Shenhua

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

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

Diversification Opportunities for Peabody Energy and China Shenhua

0.29

Correlation Coefficient

Peabody Energy  China Shenhua

Modest diversification

The 3 months correlation between Peabody and China is 0.29. Overlapping area represents the amount of risk that can be diversified away by holding Peabody Energy and China Shenhua Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Shenhua Energy and Peabody Energy 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 Peabody Energy are associated (or correlated) with China Shenhua. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Shenhua Energy has no effect on the direction of Peabody Energy i.e., Peabody Energy and China Shenhua go up and down completely randomly.

Pair Corralation between Peabody Energy and China Shenhua

Assuming the 90 days horizon Peabody Energy is expected to generate 3.25 times less return on investment than China Shenhua. But when comparing it to its historical volatility, Peabody Energy is 1.28 times less risky than China Shenhua. It trades about 0.03 of its potential returns per unit of risk. China Shenhua Energy is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  349.00  in China Shenhua Energy on September 18, 2024 and sell it today you would earn a total of  55.00  from holding China Shenhua Energy or generate 15.76% return on investment over 90 days.

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

Peabody Energy  vs.  China Shenhua Energy

Peabody Energy

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Peabody Energy are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Peabody Energy is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

China Shenhua Energy

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in China Shenhua Energy are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, China Shenhua reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Peabody Energy and China Shenhua

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

The idea behind Peabody Energy and China Shenhua Energy 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.