Correlation Between Companhia and China Water

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

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

Diversification Opportunities for Companhia and China Water

-0.58

Correlation Coefficient

Companhia  China Water

Excellent diversification

The 3 months correlation between Companhia and China is -0.58. Overlapping area represents the amount of risk that can be diversified away by holding Companhia de Saneamento and China Water Affairs in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Water Affairs and Companhia 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 Companhia de Saneamento are associated (or correlated) with China Water. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Water Affairs has no effect on the direction of Companhia i.e., Companhia and China Water go up and down completely randomly.

Pair Corralation between Companhia and China Water

Assuming the 90 days trading horizon Companhia de Saneamento is expected to under-perform the China Water. But the stock apears to be less risky and, when comparing its historical volatility, Companhia de Saneamento is 2.82 times less risky than China Water. The stock trades about -0.1 of its potential returns per unit of risk. The China Water Affairs is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  38.00  in China Water Affairs on September 23, 2024 and sell it today you would earn a total of  21.00  from holding China Water Affairs or generate 55.26% return on investment over 90 days.

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

Companhia de Saneamento  vs.  China Water Affairs

Companhia de Saneamento

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Companhia de Saneamento has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's forward-looking indicators remain nearly stable which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

China Water Affairs

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in China Water Affairs are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile fundamental drivers, China Water reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Companhia and China Water

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

The idea behind Companhia de Saneamento and China Water Affairs 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..