Correlation Between Standard and China Automotive

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

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

Diversification Opportunities for Standard and China Automotive

0.03

Correlation Coefficient

Standard  China Automotive

Significant diversification

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

Pair Corralation between Standard and China Automotive

Considering the 90-day investment horizon Standard Motor Products is expected to generate 1.31 times more return on investment than China Automotive. However, Standard is 1.31 times more volatile than China Automotive Systems. It trades about 0.04 of its potential returns per unit of risk. China Automotive Systems is currently generating about -0.06 per unit of risk. If you would invest  2,991  in Standard Motor Products on September 21, 2024 and sell it today you would earn a total of  111.00  from holding Standard Motor Products or generate 3.71% return on investment over 90 days.

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

Standard Motor Products  vs.  China Automotive Systems

Standard Motor Products

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Standard Motor Products has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable primary indicators, Standard is not utilizing all of its potentials. The recent stock price agitation, may contribute to short-term losses for the retail investors.

China Automotive Systems

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in China Automotive Systems are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unfluctuating basic indicators, China Automotive may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Standard and China Automotive

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

The idea behind Standard Motor Products and China Automotive Systems 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.