Correlation Between China Reform and Shandong Rike

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

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

Diversification Opportunities for China Reform and Shandong Rike

0.61

Correlation Coefficient

China Reform  Shandong Rike

Poor diversification

The 3 months correlation between China and Shandong is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding China Reform Health and Shandong Rike Chemical in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Shandong Rike Chemical and China Reform 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 Reform Health are associated (or correlated) with Shandong Rike. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Shandong Rike Chemical has no effect on the direction of China Reform i.e., China Reform and Shandong Rike go up and down completely randomly.

Pair Corralation between China Reform and Shandong Rike

Assuming the 90 days trading horizon China Reform Health is expected to under-perform the Shandong Rike. But the stock apears to be less risky and, when comparing its historical volatility, China Reform Health is 1.42 times less risky than Shandong Rike. The stock trades about -0.01 of its potential returns per unit of risk. The Shandong Rike Chemical is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  551.00  in Shandong Rike Chemical on December 25, 2024 and sell it today you would earn a total of  123.00  from holding Shandong Rike Chemical or generate 22.32% return on investment over 90 days.

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

China Reform Health  vs.  Shandong Rike Chemical

China Reform Health

Risk-Adjusted Performance

Very Weak

Over the last 90 days China Reform Health has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, China Reform is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Shandong Rike Chemical

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Shandong Rike Chemical are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Shandong Rike sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Reform and Shandong Rike

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

The idea behind China Reform Health and Shandong Rike Chemical 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.