Correlation Between China Securities and GEM

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

By analyzing existing cross correlation between China Securities 800 and GEM Co, you can compare the effects of market volatilities on China Securities and GEM 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 China Securities with a short position of GEM. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Securities and GEM.

Diversification Opportunities for China Securities and GEM

0.84

Correlation Coefficient

China Securities  GEM

Very poor diversification

The 3 months correlation between China and GEM is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding China Securities 800 and GEM Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on GEM Co and China Securities 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 China Securities 800 are associated (or correlated) with GEM. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of GEM Co has no effect on the direction of China Securities i.e., China Securities and GEM go up and down completely randomly.

Pair Corralation between China Securities and GEM

Assuming the 90 days trading horizon China Securities 800 is expected to generate 0.57 times more return on investment than GEM. However, China Securities 800 is 1.77 times less risky than GEM. It trades about 0.0 of its potential returns per unit of risk. GEM Co is currently generating about 0.0 per unit of risk. If you would invest  434,920  in China Securities 800 on September 28, 2024 and sell it today you would lose (5,303) from holding China Securities 800 or give up 1.22% of portfolio value over 90 days.

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

China Securities 800  vs.  GEM Co

Pair Trading with China Securities and GEM

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

The idea behind China Securities 800 and GEM 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 Bonds Directory module to find actively traded corporate debentures issued by US companies.