Correlation Between Digital China and DRLimited

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

Diversification Opportunities for Digital China and DRLimited

0.26

Correlation Coefficient

Digital China  DRLimited

Modest diversification

The 3 months correlation between Digital and DRLimited is 0.26. Overlapping area represents the amount of risk that can be diversified away by holding Digital China Information and DR Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DR Limited 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 DRLimited. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DR Limited has no effect on the direction of Digital China i.e., Digital China and DRLimited go up and down completely randomly.

Pair Corralation between Digital China and DRLimited

Assuming the 90 days trading horizon Digital China Information is expected to generate 1.47 times more return on investment than DRLimited. However, Digital China is 1.47 times more volatile than DR Limited. It trades about 0.06 of its potential returns per unit of risk. DR Limited is currently generating about 0.03 per unit of risk. If you would invest  1,215  in Digital China Information on December 3, 2024 and sell it today you would earn a total of  128.00  from holding Digital China Information or generate 10.53% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.31%
Values	Daily Returns

Digital China Information  vs.  DR Limited

Digital China Information

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Digital China Information are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Digital China sustained solid returns over the last few months and may actually be approaching a breakup point.

DR Limited

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in DR Limited are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, DRLimited is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Digital China and DRLimited

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

The idea behind Digital China Information and DR Limited 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 Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.