Correlation Between City Development and Dalian Thermal

Can any of the company-specific risk be diversified away by investing in both City Development and Dalian Thermal 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 City Development and Dalian Thermal into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between City Development Environment and Dalian Thermal Power, you can compare the effects of market volatilities on City Development and Dalian Thermal 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 City Development with a short position of Dalian Thermal. Check out your portfolio center. Please also check ongoing floating volatility patterns of City Development and Dalian Thermal.

Diversification Opportunities for City Development and Dalian Thermal

0.71

Correlation Coefficient

City Development  Dalian Thermal

Poor diversification

The 3 months correlation between City and Dalian is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding City Development Environment and Dalian Thermal Power in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dalian Thermal Power and City Development 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 City Development Environment are associated (or correlated) with Dalian Thermal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dalian Thermal Power has no effect on the direction of City Development i.e., City Development and Dalian Thermal go up and down completely randomly.

Pair Corralation between City Development and Dalian Thermal

Assuming the 90 days trading horizon City Development Environment is expected to generate 0.58 times more return on investment than Dalian Thermal. However, City Development Environment is 1.74 times less risky than Dalian Thermal. It trades about -0.05 of its potential returns per unit of risk. Dalian Thermal Power is currently generating about -0.11 per unit of risk. If you would invest  1,323  in City Development Environment on October 6, 2024 and sell it today you would lose (67.00) from holding City Development Environment or give up 5.06% of portfolio value over 90 days.

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

City Development Environment  vs.  Dalian Thermal Power

City Development Env

Risk-Adjusted Performance

0 of 100

Very Weak

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

Dalian Thermal Power

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Dalian Thermal Power has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with City Development and Dalian Thermal

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

The idea behind City Development Environment and Dalian Thermal Power 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.