Correlation Between Guangzhou Dongfang and Air China

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

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

Diversification Opportunities for Guangzhou Dongfang and Air China

0.8

Correlation Coefficient

Guangzhou Dongfang  Air China

Very poor diversification

The 3 months correlation between Guangzhou and Air is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Guangzhou Dongfang Hotel and Air China Ltd in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Air China and Guangzhou Dongfang 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 Guangzhou Dongfang Hotel are associated (or correlated) with Air China. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Air China has no effect on the direction of Guangzhou Dongfang i.e., Guangzhou Dongfang and Air China go up and down completely randomly.

Pair Corralation between Guangzhou Dongfang and Air China

Assuming the 90 days trading horizon Guangzhou Dongfang Hotel is expected to generate 1.89 times more return on investment than Air China. However, Guangzhou Dongfang is 1.89 times more volatile than Air China Ltd. It trades about 0.04 of its potential returns per unit of risk. Air China Ltd is currently generating about 0.03 per unit of risk. If you would invest  891.00  in Guangzhou Dongfang Hotel on September 24, 2024 and sell it today you would earn a total of  179.00  from holding Guangzhou Dongfang Hotel or generate 20.09% return on investment over 90 days.

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

Guangzhou Dongfang Hotel  vs.  Air China Ltd

Guangzhou Dongfang Hotel

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Guangzhou Dongfang Hotel are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Guangzhou Dongfang sustained solid returns over the last few months and may actually be approaching a breakup point.

Air China

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Air China Ltd are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Air China sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Guangzhou Dongfang and Air China

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

The idea behind Guangzhou Dongfang Hotel and Air China Ltd 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.