Correlation Between Hunan Investment and China Construction

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

By analyzing existing cross correlation between Hunan Investment Group and China Construction Bank, you can compare the effects of market volatilities on Hunan Investment and China Construction 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 Hunan Investment with a short position of China Construction. Check out your portfolio center. Please also check ongoing floating volatility patterns of Hunan Investment and China Construction.

Diversification Opportunities for Hunan Investment and China Construction

0.71

Correlation Coefficient

Hunan Investment  China Construction

Poor diversification

The 3 months correlation between Hunan and China is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding Hunan Investment Group and China Construction Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Construction Bank and Hunan Investment 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 Hunan Investment Group are associated (or correlated) with China Construction. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Construction Bank has no effect on the direction of Hunan Investment i.e., Hunan Investment and China Construction go up and down completely randomly.

Pair Corralation between Hunan Investment and China Construction

Assuming the 90 days trading horizon Hunan Investment Group is expected to generate 2.09 times more return on investment than China Construction. However, Hunan Investment is 2.09 times more volatile than China Construction Bank. It trades about 0.23 of its potential returns per unit of risk. China Construction Bank is currently generating about 0.19 per unit of risk. If you would invest  398.00  in Hunan Investment Group on September 12, 2024 and sell it today you would earn a total of  200.00  from holding Hunan Investment Group or generate 50.25% return on investment over 90 days.

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

Hunan Investment Group  vs.  China Construction Bank

Hunan Investment

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Hunan Investment Group are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Hunan Investment sustained solid returns over the last few months and may actually be approaching a breakup point.

China Construction Bank

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in China Construction Bank are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, China Construction sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Hunan Investment and China Construction

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

The idea behind Hunan Investment Group and China Construction Bank 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.