Correlation Between Digital China and Yonyou Auto

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

Diversification Opportunities for Digital China and Yonyou Auto

0.8

Correlation Coefficient

Digital China  Yonyou Auto

Very poor diversification

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

Pair Corralation between Digital China and Yonyou Auto

Assuming the 90 days trading horizon Digital China Information is expected to generate 1.76 times more return on investment than Yonyou Auto. However, Digital China is 1.76 times more volatile than Yonyou Auto Information. It trades about -0.01 of its potential returns per unit of risk. Yonyou Auto Information is currently generating about -0.03 per unit of risk. If you would invest  1,123  in Digital China Information on October 17, 2024 and sell it today you would lose (87.00) from holding Digital China Information or give up 7.75% of portfolio value over 90 days.

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

Digital China Information  vs.  Yonyou Auto Information

Digital China Information

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Digital China Information has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Digital China is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Yonyou Auto Information

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Yonyou Auto Information has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Yonyou Auto 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 Yonyou Auto

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

The idea behind Digital China Information and Yonyou Auto Information 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.

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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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.