Correlation Between ChengDu Hi and Guangzhou Seagull

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

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

Diversification Opportunities for ChengDu Hi and Guangzhou Seagull

0.31

Correlation Coefficient

ChengDu Hi  Guangzhou Seagull

Weak diversification

The 3 months correlation between ChengDu and Guangzhou is 0.31. Overlapping area represents the amount of risk that can be diversified away by holding ChengDu Hi Tech Development and Guangzhou Seagull Kitchen in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Guangzhou Seagull Kitchen and ChengDu Hi 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 ChengDu Hi Tech Development are associated (or correlated) with Guangzhou Seagull. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Guangzhou Seagull Kitchen has no effect on the direction of ChengDu Hi i.e., ChengDu Hi and Guangzhou Seagull go up and down completely randomly.

Pair Corralation between ChengDu Hi and Guangzhou Seagull

Assuming the 90 days trading horizon ChengDu Hi Tech Development is expected to generate 1.39 times more return on investment than Guangzhou Seagull. However, ChengDu Hi is 1.39 times more volatile than Guangzhou Seagull Kitchen. It trades about 0.08 of its potential returns per unit of risk. Guangzhou Seagull Kitchen is currently generating about 0.03 per unit of risk. If you would invest  3,357  in ChengDu Hi Tech Development on October 2, 2024 and sell it today you would earn a total of  2,964  from holding ChengDu Hi Tech Development or generate 88.29% return on investment over 90 days.

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

ChengDu Hi Tech Development  vs.  Guangzhou Seagull Kitchen

ChengDu Hi Tech

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in ChengDu Hi Tech Development are ranked lower than 6 (%) 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.

Guangzhou Seagull Kitchen

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with ChengDu Hi and Guangzhou Seagull

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

The idea behind ChengDu Hi Tech Development and Guangzhou Seagull Kitchen 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.