Correlation Between Shenwu Energy and North Huajin

Can any of the company-specific risk be diversified away by investing in both Shenwu Energy and North Huajin 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 Shenwu Energy and North Huajin into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Shenwu Energy Saving and North Huajin Chemical, you can compare the effects of market volatilities on Shenwu Energy and North Huajin 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 Shenwu Energy with a short position of North Huajin. Check out your portfolio center. Please also check ongoing floating volatility patterns of Shenwu Energy and North Huajin.

Diversification Opportunities for Shenwu Energy and North Huajin

0.7

Correlation Coefficient

Shenwu Energy  North Huajin

Poor diversification

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

Pair Corralation between Shenwu Energy and North Huajin

Assuming the 90 days trading horizon Shenwu Energy Saving is expected to generate 1.45 times more return on investment than North Huajin. However, Shenwu Energy is 1.45 times more volatile than North Huajin Chemical. It trades about 0.13 of its potential returns per unit of risk. North Huajin Chemical is currently generating about 0.06 per unit of risk. If you would invest  304.00  in Shenwu Energy Saving on October 17, 2024 and sell it today you would earn a total of  107.00  from holding Shenwu Energy Saving or generate 35.2% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.44%
Values	Daily Returns

Shenwu Energy Saving  vs.  North Huajin Chemical

Shenwu Energy Saving

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Shenwu Energy Saving are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Shenwu Energy sustained solid returns over the last few months and may actually be approaching a breakup point.

North Huajin Chemical

Risk-Adjusted Performance

4 of 100

Insignificant

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

Pair Trading with Shenwu Energy and North Huajin

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

The idea behind Shenwu Energy Saving and North Huajin Chemical 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.