Correlation Between Weichai Heavy and Daoming OpticsChemical

Can any of the company-specific risk be diversified away by investing in both Weichai Heavy and Daoming OpticsChemical 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 Weichai Heavy and Daoming OpticsChemical into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Weichai Heavy Machinery and Daoming OpticsChemical Co, you can compare the effects of market volatilities on Weichai Heavy and Daoming OpticsChemical 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 Weichai Heavy with a short position of Daoming OpticsChemical. Check out your portfolio center. Please also check ongoing floating volatility patterns of Weichai Heavy and Daoming OpticsChemical.

Diversification Opportunities for Weichai Heavy and Daoming OpticsChemical

0.55

Correlation Coefficient

Weichai Heavy  Daoming OpticsChemical

Very weak diversification

The 3 months correlation between Weichai and Daoming is 0.55. Overlapping area represents the amount of risk that can be diversified away by holding Weichai Heavy Machinery and Daoming OpticsChemical Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Daoming OpticsChemical and Weichai Heavy 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 Weichai Heavy Machinery are associated (or correlated) with Daoming OpticsChemical. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Daoming OpticsChemical has no effect on the direction of Weichai Heavy i.e., Weichai Heavy and Daoming OpticsChemical go up and down completely randomly.

Pair Corralation between Weichai Heavy and Daoming OpticsChemical

Assuming the 90 days trading horizon Weichai Heavy Machinery is expected to generate 2.0 times more return on investment than Daoming OpticsChemical. However, Weichai Heavy is 2.0 times more volatile than Daoming OpticsChemical Co. It trades about 0.19 of its potential returns per unit of risk. Daoming OpticsChemical Co is currently generating about -0.01 per unit of risk. If you would invest  1,849  in Weichai Heavy Machinery on December 26, 2024 and sell it today you would earn a total of  1,387  from holding Weichai Heavy Machinery or generate 75.01% return on investment over 90 days.

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

Weichai Heavy Machinery  vs.  Daoming OpticsChemical Co

Weichai Heavy Machinery

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Weichai Heavy Machinery are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Weichai Heavy sustained solid returns over the last few months and may actually be approaching a breakup point.

Daoming OpticsChemical

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Weichai Heavy and Daoming OpticsChemical

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

The idea behind Weichai Heavy Machinery and Daoming OpticsChemical 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.