Correlation Between Chongqing Changan and Dongfeng Automobile

Can any of the company-specific risk be diversified away by investing in both Chongqing Changan and Dongfeng Automobile 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 Chongqing Changan and Dongfeng Automobile into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Chongqing Changan Automobile and Dongfeng Automobile Co, you can compare the effects of market volatilities on Chongqing Changan and Dongfeng Automobile 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 Chongqing Changan with a short position of Dongfeng Automobile. Check out your portfolio center. Please also check ongoing floating volatility patterns of Chongqing Changan and Dongfeng Automobile.

Diversification Opportunities for Chongqing Changan and Dongfeng Automobile

0.76

Correlation Coefficient

Chongqing Changan  Dongfeng Automobile

Poor diversification

The 3 months correlation between Chongqing and Dongfeng is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding Chongqing Changan Automobile and Dongfeng Automobile Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dongfeng Automobile and Chongqing Changan 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 Chongqing Changan Automobile are associated (or correlated) with Dongfeng Automobile. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dongfeng Automobile has no effect on the direction of Chongqing Changan i.e., Chongqing Changan and Dongfeng Automobile go up and down completely randomly.

Pair Corralation between Chongqing Changan and Dongfeng Automobile

Assuming the 90 days trading horizon Chongqing Changan Automobile is expected to generate 0.71 times more return on investment than Dongfeng Automobile. However, Chongqing Changan Automobile is 1.41 times less risky than Dongfeng Automobile. It trades about 0.05 of its potential returns per unit of risk. Dongfeng Automobile Co is currently generating about -0.01 per unit of risk. If you would invest  1,390  in Chongqing Changan Automobile on September 26, 2024 and sell it today you would earn a total of  19.00  from holding Chongqing Changan Automobile or generate 1.37% return on investment over 90 days.

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

Chongqing Changan Automobile  vs.  Dongfeng Automobile Co

Chongqing Changan

Risk-Adjusted Performance

4 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Chongqing Changan Automobile are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Chongqing Changan may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Dongfeng Automobile

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Dongfeng Automobile Co are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Dongfeng Automobile sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Chongqing Changan and Dongfeng Automobile

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

The idea behind Chongqing Changan Automobile and Dongfeng Automobile Co 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 Portfolio Dashboard module to portfolio dashboard that provides centralized access to all your investments.