Correlation Between China Reform and Shanghai Action

Can any of the company-specific risk be diversified away by investing in both China Reform and Shanghai Action 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 Shanghai Action 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 Shanghai Action Education, you can compare the effects of market volatilities on China Reform and Shanghai Action 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 Shanghai Action. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Reform and Shanghai Action.

Diversification Opportunities for China Reform and Shanghai Action

0.52

Correlation Coefficient

China Reform  Shanghai Action

Very weak diversification

The 3 months correlation between China and Shanghai is 0.52. Overlapping area represents the amount of risk that can be diversified away by holding China Reform Health and Shanghai Action Education in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Shanghai Action Education 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 Shanghai Action. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Shanghai Action Education has no effect on the direction of China Reform i.e., China Reform and Shanghai Action go up and down completely randomly.

Pair Corralation between China Reform and Shanghai Action

Assuming the 90 days trading horizon China Reform Health is expected to under-perform the Shanghai Action. In addition to that, China Reform is 1.82 times more volatile than Shanghai Action Education. It trades about -0.01 of its total potential returns per unit of risk. Shanghai Action Education is currently generating about 0.2 per unit of volatility. If you would invest  3,408  in Shanghai Action Education on December 26, 2024 and sell it today you would earn a total of  844.00  from holding Shanghai Action Education or generate 24.77% return on investment over 90 days.

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

China Reform Health  vs.  Shanghai Action Education

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.

Shanghai Action Education

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Shanghai Action Education are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Shanghai Action sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with China Reform and Shanghai Action

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

The idea behind China Reform Health and Shanghai Action Education 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.