Correlation Between Digital China and ChengDu Hi

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

By analyzing existing cross correlation between Digital China Information and ChengDu Hi Tech Development, you can compare the effects of market volatilities on Digital China and ChengDu Hi 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 Digital China with a short position of ChengDu Hi. Check out your portfolio center. Please also check ongoing floating volatility patterns of Digital China and ChengDu Hi.

Diversification Opportunities for Digital China and ChengDu Hi

0.7

Correlation Coefficient

Digital China  ChengDu Hi

Poor diversification

The 3 months correlation between Digital and ChengDu is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Digital China Information and ChengDu Hi Tech Development in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ChengDu Hi Tech and Digital China 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 Digital China Information are associated (or correlated) with ChengDu Hi. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ChengDu Hi Tech has no effect on the direction of Digital China i.e., Digital China and ChengDu Hi go up and down completely randomly.

Pair Corralation between Digital China and ChengDu Hi

Assuming the 90 days trading horizon Digital China is expected to generate 1.46 times less return on investment than ChengDu Hi. But when comparing it to its historical volatility, Digital China Information is 1.07 times less risky than ChengDu Hi. It trades about 0.07 of its potential returns per unit of risk. ChengDu Hi Tech Development is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  4,369  in ChengDu Hi Tech Development on September 29, 2024 and sell it today you would earn a total of  1,996  from holding ChengDu Hi Tech Development or generate 45.69% return on investment over 90 days.

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

Digital China Information  vs.  ChengDu Hi Tech Development

Digital China Information

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Digital China Information are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Digital China may actually be approaching a critical reversion point that can send shares even higher in January 2025.

ChengDu Hi Tech

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in ChengDu Hi Tech Development are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, ChengDu Hi sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Digital China and ChengDu Hi

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

The idea behind Digital China Information and ChengDu Hi Tech Development 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.